Flexible vs. dedicated technology choice in the presence of multiproduct subscription programs

• Main Authors: LU, Liling, BOYABATLI, Onur, GAO, Sarah Yini
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: capacity; exibility; technology; multiproduct newsvendor; subscription; Management Information Systems; Technology and Innovation
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7670; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8669/viewcontent/lu_boyabatli_gao_27dec2024.pdf
• Institution: Singapore Management University

Recently, automotive manufacturers have started offering multi-car subscription programs that give customers access to a menu of car models with possibility of switching between the models. The maintenance and depreciation costs during the program are borne by the manufacturers before the cars are sold in the pre-owned market. This paper studies how offering such a subscription program shapes the firm’s flexible versus dedicated technology choice and capacity investment decisions. We consider a two-product firm that makes these decisions under uncertain demand in a single subscription period. The firm faces two types of demand based on which product is requested at the beginning of the period. Halfway through the period, a proportion of the existing customers returns their allocated product and requests switching to the other product. The firm incurs a cost unless this request is satisfied by the existing fleet. In deciding the manufacturing volume the firm considers the realized demand and the future switching requests where some products can be reserved to satisfy these requests. We characterize the firm’s optimal decisions and examine how demand correlation shapes the firm’s profitability and the optimal technology choice. We demonstrate that our findings can be significantly different from those in the traditional setting (where the firm sells its products). We find that an increase in correlation increases the profitability with dedicated technology and it may also increase the profitability with flexible technology. When the investment costs are equal, flexible technology may not be preferable even if demands are not perfectly positively correlated.