A Stochastic Theory of the Firm

Lode Li
Lode Li
Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
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Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139

Published Online:1 Aug 1988https://doi.org/10.1287/moor.13.3.447

Abstract

We present a stochastic model of make-to-stock firms based on a buffer flow system with jumps. The cumulative production and the cumulative demand are governed by two Poisson counting processes with random intensities parameterized by production capacity and price respectively. Optimal operating and pricing policies (short-run decisions) and optimal capacity (long-run) decisions are explored by application of a two-stage optimization device. Detailed computations regarding the Poisson buffer flow system and a variation on the basic model with learning effects are also presented.

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cover image Mathematics of Operations Research

Volume 13, Issue 3

August 1988

Pages 377-534

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Published Online:August 01, 1988

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Lode Li, (1988) A Stochastic Theory of the Firm. Mathematics of Operations Research 13(3):447-466.

https://doi.org/10.1287/moor.13.3.447

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A Stochastic Theory of the Firm

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Volume 13, Issue 3

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