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Optimal production and selling policies with fixed-price contracts and contingent-price offers

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  • Ku, Cheng-Yuan
  • Chang, Yi-Wen

Abstract

This paper investigates optimal production and selling decisions for a single supplier with two types of customers. Specifically, risk-averse buyers would rather pay higher fixed prices with guaranteed supply contracts whereas risk-prone buyers prefer to secure remaining stocks and pay lower contingent prices. This study formulized this problem with a dynamic programming model and analyzed it further using successive approximations. Theoretical results indicate that no controls are needed for fixed-price orders. However, thresholds exist for manufacturing and contingent-price ordering policies. These two types of threshold planes increased with the addition of waiting customers. Furthermore, a sensitivity analysis of seasonal factors revealed that the optimal threshold plane shifts upward during high demand periods.

Suggested Citation

  • Ku, Cheng-Yuan & Chang, Yi-Wen, 2012. "Optimal production and selling policies with fixed-price contracts and contingent-price offers," International Journal of Production Economics, Elsevier, vol. 137(1), pages 94-101.
    • Handle: RePEc:eee:proeco:v:137:y:2012:i:1:p:94-101
    DOI: 10.1016/j.ijpe.2012.01.019
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