OPTIMAL CAPACITY WITH STOCHASTIC DEMAND

A model focusing on the choice of capacity in an environment with stoc hastic demand is presented. The paper establishes the conditions under which bias in traditional econometric measures of capacity utilizatio n may occur. As illustration, the model is applied to the Norwegian ve ssel-building industry. The results from traditional econometric studi es in this industry are adjusted using the results from the model pres ented. The analysis indicates an upward bias in the traditional capaci ty utilization index; the excess capacity in the analyzed industry, as determined by deviation from the optimal, stochastically-adjusted lev el of capacity, is higher than that determined by traditional economet ric measures. However, the author is reluctant to draw definitive conc lusions from the empirical part of the paper due to uncertainty regard ing data and assumptions made. The empirical implementation is primari ly illustrative and should be interpreted as such.