On the Learning Benefits of Resource Flexibility

Abstract

Resource flexibility, arguably among the most celebrated operational concepts, is known to provide firms facing demand uncertainty with such benefits as risk pooling, revenue-maximization optionality, and operational hedging. In this paper, we uncover a heretofore unknown benefit: we establish that resource flexibility facilitates learning the demand when the latter is censored, which could, in turn, enable firms to make better-informed future operational decisions, thereby increasing profitability. Further, we quantify these learning benefits of flexibility and find that they could be of the same order of magnitude as the extensively studied risk-pooling benefits of flexibility. This suggests that flexibility’s learning benefits could be a first-order consideration and that extant theories, which view flexibility only as the ability to act ex post, could be underestimating its true value when learning the demand is desirable, for example, when it enables managers to make better ex ante capacity, assortment, or pricing decisions in future periods. This paper was accepted by Vishal Gaur, operations management.