IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v15y2013i1p86-101.html
   My bibliography  Save this article

Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/msom.1120.0404
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kamel Jedidi & Carl F. Mela & Sunil Gupta, 1999. "Managing Advertising and Promotion for Long-Run Profitability," Marketing Science, INFORMS, vol. 18(1), pages 1-22.
    2. Adam Copeland & Wendy E. Dunn & George J. Hall, 2005. "Prices, production, and inventories over the automotive model year," Finance and Economics Discussion Series 2005-25, Board of Governors of the Federal Reserve System (U.S.), revised 2005.
    3. Bish, Ebru K. & Suwandechochai, Rawee, 2010. "Optimal capacity for substitutable products under operational postponement," European Journal of Operational Research, Elsevier, vol. 207(2), pages 775-783, December.
    4. Gregory A. DeCroix & Antonio Arreola-Risa, 1998. "Optimal Production and Inventory Policy for Multiple Products Under Resource Constraints," Management Science, INFORMS, vol. 44(7), pages 950-961, July.
    5. Ofer H. Azar, 2011. "Relative thinking in consumer choice between differentiated goods and services and its implications for business strategy," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(2), pages 176-185, February.
    6. Ebru K. Bish & Ana Muriel & Stephan Biller, 2005. "Managing Flexible Capacity in a Make-to-Order Environment," Management Science, INFORMS, vol. 51(2), pages 167-180, February.
    7. T. M. Whitin, 1955. "Inventory Control and Price Theory," Management Science, INFORMS, vol. 2(1), pages 61-68, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:15:y:2013:i:1:p:86-101. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew Walls). General contact details of provider: http://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.