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Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility

Author

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  • Oben Ceryan

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Ozge Sahin

    (The Johns Hopkins Carey Business School, Baltimore, Maryland 21202)

  • Izak Duenyas

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

Firms that offer multiple products are often susceptible to periods of inventory mismatches where one product may face shortages while the other has excess inventories. In this paper, we study a joint implementation of price- and capacity-based substitution mechanisms to alleviate the level of such inventory disparities. We consider a firm producing substitutable products via a capacity portfolio consisting of both product-dedicated and flexible resources and characterize the structure of the optimal production and pricing decisions. We then explore how changes in various problem parameters affect the optimal policy structure. We show that the availability of a flexible resource helps maintain stable price differences across products over time even though the price of each product may fluctuate over time. This result has favorable ramifications from a marketing standpoint because it suggests that even when a firm applies a dynamic pricing strategy, it may still establish consistent price positioning among multiple products if it can employ a flexible replenishment resource. We provide numerical examples for the price stabilization effect and discuss extensions of our results to a more general multiple product setting.

Suggested Citation

  • Oben Ceryan & Ozge Sahin & Izak Duenyas, 2013. "Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 86-101, April.
    • Handle: RePEc:inm:ormsom:v:15:y:2013:i:1:p:86-101
    DOI: 10.1287/msom.1120.0404
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    References listed on IDEAS

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    Cited by:

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    3. Jalali, Hamed & Ansaripoor, Amir H. & De Giovanni, Pietro, 2020. "Closed-loop supply chains with complementary products," International Journal of Production Economics, Elsevier, vol. 229(C).
    4. He, Wen, 2019. "Impact of capacity flexibility on the use of booking limits," European Journal of Operational Research, Elsevier, vol. 274(1), pages 199-213.
    5. Heng Du & Tiaojun Xiao, 2019. "Pricing Strategies for Competing Adaptive Retailers Facing Complex Consumer Behavior: Agent-based Model," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 18(06), pages 1909-1939, November.
    6. Xin Chen & Peng Hu & Simai He, 2013. "Technical Note---Preservation of Supermodularity in Parametric Optimization Problems with Nonlattice Structures," Operations Research, INFORMS, vol. 61(5), pages 1166-1173, October.
    7. Fang, Fei & Nguyen, Tri-Dung & Currie, Christine S.M., 2021. "Joint pricing and inventory decisions for substitutable and perishable products under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 293(2), pages 594-602.
    8. Verma, Nishant Kumar & Chatterjee, Ashish K., 2023. "Process flexibility in the presence of product modularity: Does modularity help?," International Journal of Production Economics, Elsevier, vol. 256(C).
    9. Tianxiao Chen & Xiting Gong & Qing Li & He Xu, 2021. "Multiseason production planning under export quotas," Naval Research Logistics (NRL), John Wiley & Sons, vol. 68(3), pages 279-294, April.
    10. Xiting Gong & Xiuli Chao, 2013. "Technical Note---Optimal Control Policy for Capacitated Inventory Systems with Remanufacturing," Operations Research, INFORMS, vol. 61(3), pages 603-611, June.
    11. Boonman, H.J. & Hagspiel, V. & Kort, P.M., 2015. "Dedicated vs product flexible production technology: Strategic capacity investment choice," European Journal of Operational Research, Elsevier, vol. 244(1), pages 141-152.
    12. Youyi Feng & Jianjun Xu & Shaohui Zheng, 2019. "Technical Note—Dynamic Optimal Policy for an Inventory System of Two Substitutable Products with Positive Replenishment Lead Times," Operations Research, INFORMS, vol. 67(4), pages 1027-1034, July.
    13. Antonio Moreno & Christian Terwiesch, 2015. "Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 428-444, October.

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