Capacity expansion under stochastic demands

Capacity expansion under stochastic demands

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Article ID: iaor199317
Country: United States
Volume: 40
Start Page Number: 445
End Page Number: 451
Publication Date: May 1992
Journal: Operations Research
Authors: , ,
Keywords: stochastic processes
Abstract:

The authors consider the problem of optimally meeting a stochastically growing demand for capacity over an infinite horizon. Under the assumption that demand for product follows either a nonlinear Brownian motion or a non-Markovian birth and death process, they show that this stochastic problem can be transformed into an equivalent deterministic problem. Consistent with earlier work by A. Manne, the equivalent problem is formed by replacing the stochastic demand by its deterministic trend and discounting all costs by a new interest rate that is smaller than the original, in approximate proportion to the uncertainty in the demand.

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