Influence Diagrams for Capacity Planning and Pricing under Uncertainty

ABSTRACT: Influence diagrams are presented as a complement to analytical methods for solving capacity‐planning and pricing problems under uncertainty. An influence diagram model that permits continuous decision variables is used to determine optimal decision rules for a single product monopolist making capacity and price selections once per period. Solutions under different scenarios based on the timing of actual demand observations and the ability to adjust initial capacity are compared to previous solutions in the literature. The results demonstrate that optimal decision rules for capacity and price determined using influence diagrams closely approximate those found using analytical approaches. The influence diagram is used to determine the effect of changing demand function parameters on the optimal solutions. Additionally, the influence diagram model can be adapted to solve capacity‐planning problems that do not meet the assumptions required to obtain analytical solutions or heuristics in previous studies.