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A strategic capacity planning tool for a firm in the newsprint industry

University of British Columbia

A strategic planning tool has been developed to help a firm in the North American newsprint industry decide whether to expand its capacity. This tool can also be used as an industry model, to forecast capacity decisions under various conditions. Key features of the model are the explicit consideration of the interdependence between firms and the recognition of the lumpiness of capacity expansion. Individual firms and groups of firms are modelled. All firms are assumed to determine their best capacity option taking into consideration the capacity decisions of other firms. The model uses an open loop Nash equilibrium concept to solve the capacity expansion problem. Firms also simultaneously determine their profit-maximizing production in each year, given their capacities. Demand functions for each year are specified, and demand scenarios may be subject to uncertainty. The model was applied to the newsprint industry for the 1979 to 1983 time period. The top five firms in the industry were modelled as individual firms. The next eight firms were modelled as two groups of four identical firms. The behaviour of the fringe (i.e., the remaining 20% of total industry capacity) was forecast exogenously. Historical firm and industry capacities, production levels and prices were compared to model simulations under three different assumptions for firm objectives: profit maximization, market share maximization subject to a profitability constraint, and maximization of expected utility assuming exponential utility functions for all firms (with different assumptions about attitudes of firms towards risk). The constrained market share maximization hypothesis best explained observed behaviour. Multiple equilibria were often computed and methods for addressing this problem were discussed.

Text

2011-01-12

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http://hdl.handle.net/2429/30599

Business Administration

University of British Columbia

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