City Research Online

Abstract

We study how a firm’s pricing flexibility to potentially increase its prices during a disruption impacts its decisions on the level of reserve inventory or reserve capacity to carry in anticipation of disruptions. While the reserve inventory provides a certain quantity of inventory that the firm can continue to sell during a disruption, reserve capacity allows the firm to maintain production during a disruption at a certain production rate. Specifically, we consider a firm producing a single product and that is exposed to random disruptions. The firm first decides on the level of reserve inventory or reserve capacity to carry in anticipation of disruptions. When a disruption does occur, it may then choose to adjust its price to better align demand with the supply restrictions during the disruption. For both reserve inventory and reserve capacity cases, we characterize the firm’s optimal pricing decisions during disruptions, and the level of reserve inventory or reserve capacity to hold in anticipation of disruptions. We find that a certain level of pricing flexibility may be required to justify investing in holding reserve inventory or reserve capacity. Further, we also show that while a firm’s pricing flexibility during a disruption and reserve capacity decisions are substitutes, pricing flexibility and reserve inventory may act either as substitutes or complements, that is, a firm may be incentivized to carry a lower or higher amount of reserve inventory if it possesses further flexibility to increase its prices during a disruption. Finally, through numerical studies, we also investigate the sensitivity of reserve inventory or reserve capacity decisions when the firm may or may not have pricing flexibility with respect to factors such as disruption rates, disruption durations, and carrying costs for reserve inventory or reserve capacity.

Publication Type:	Monograph (Working Paper)
Additional Information:	Copyright, the authors, 2025.
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Departments:	Bayes Business School Bayes Business School > Management
SWORD Depositor:	Symplectic Administrator

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