Essays on economic evaluation of capacity decisions and operating strategy with an example from the optics industry

The dissertation consists of four papers that address the integration and evaluation of new technology by a firm facing an uncertain future and with impatient customers. The first looks at the integration of new production technology by a manufacturing firm. Since this new technology allowed the firm to make newer higher-priced products faster and at lower cost, the intuitive expectation might be to expect the firm to concentrate exclusively on the new products. I show why this did not happen and generalize the analysis to identify the conditions under which a firm would indeed keep both its new and old products and production methods. The second paper shifts the focus to the financial evaluation of new technologies. At the time the firm commits to a new technology project, it must do so in the face of uncertain future prices. The paper includes an evaluation of the financial risk of the project and specifies the optimal production capacity the firm should install and the optimal production quantity. I apply the model to a current trend in the health-care industry in which a health-care organization (HCO) shares the risk associated with high-tech equipment with the vendor by only paying for it on a per-use basis. The result is that the conventional wisdom of lowered risk for the HCO is valid only within a particular range of per-use fees. The third paper introduces lead-time considerations into the model of the second paper. I formulate a relatively simple solution. While some of the performance measures exhibit behavior similar to the case without impatient customers, important differences exist, such as the expected-price function being concave in the production volume. Consequently, firms that approximate their decisions based on the patient customers might stray significantly from the optimum. The final paper uses Options Pricing methodology from Finance to value a firm that owns the opportunity to adjust, in a future period, its capacity and production decisions after observing the realization of certain market parameters. I develop closed-form solutions suitable for numerical analysis and for understanding the effect that various parameters have on the firm's decision.