DP223 Production Decisions under Demand Uncertainty: The High-Low Search Approach

Author(s): Dennis J. Snower
Publication Date: March 1988
Keyword(s): Demand Uncertainty, Inventories, Production Decisions, Search
JEL(s): 022, 026, 511
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=223

The paper presents a model of 'high-low search' under uncertainty, in which a 'conservative' firm 'searches' for an unknown product demand by making a sequence of production decisions. After each production decision and the concomitant sales, the firm infers whether its supply is 'too high' or 'too low'. We show how the production decision reduces the firm's demand uncertainty interval and how this reduced uncertainty (in turn) affects its future production decisions.