Working Paper: CEPR ID: DP223
Authors: Steve Alpern; Dennis J. Snower
Abstract: 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.
Keywords: demand uncertainty; high-low search; inventories; production decisions
JEL Codes: 022; 026
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Production decision (D25) | Demand uncertainty interval (D89) |
| Demand uncertainty interval (D89) | Future production decisions (D25) |
| Production decision (D25) | Supply strategies (M11) |
| Supply decisions (M11) | Demand inference (D83) |
| Demand inference (D83) | Supply adjustments (E23) |