Initial Capacity Decision in an Uncertain Product Market

The uncertainty of demand for products has been a prominent issue in numerous management decisions, especially in the initial stage of providing a new product. Whether providing merchandise or a service, capacity decisions face large variances of demand. This paper addresses the impact of demand uncertainty on initial capacity decisions in the early period of providing a new product. Using a two-stage decision model, this paper finds that the optimal initial capacity level in stage one would ascend as demand variance increases if the cost of adding the capacity in stage two is relatively insignificant; otherwise, it would descend as demand uncertainty enlarges.