Davidguo
Published online ahead of print August 27, 2007
OPERATIONS RESEARCH
Articles in Advance, pp. 1–19 issn 0030-364X eissn 1526-5463
informs
®
doi 10.1287/opre.1070.0411 © 2007 INFORMS
Pricing and Manufacturing Decisions When Demand Is a Function of Prices in Multiple Periods
Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109, hsahn@umich.edu Desautels Faculty of Management, McGill University, Montréal, Quebec, Canada H3A 1G5, mehmet.gumus@mcgill.ca Department of Industrial Engineering and Operations Research, University of California at Berkeley, Berkeley, California 94720, kaminsky@ieor.berkeley.edu
Hyun-soo Ahn
Mehmet Gümüs ¸
Philip Kaminsky
In most deterministic manufacturing decision models, demand is either known or induced by pricing decisions in the period that the demand is experienced. However, in more realistic market scenarios consumers make purchase decisions with respect to price, not only in the current period, but also in past and future periods. We model a joint manufacturing/pricing decision problem, accounting for that portion of demand realized in each period that is induced by the interaction of pricing decisions in the current period and in previous periods. We formulate a mathematical programming model and develop solution techniques. We identify structural properties of our models and develop closed-form solutions and effective heuristics for various special cases of our models. Finally, we conduct extensive computational experiments to quantify the effectiveness of our heuristics and to develop managerial insights. Subject classifications: inventory/production: uncertainty, deterministic; planning horizons; operating characteristics; marketing: pricing. Area of review: Manufacturing, Service, and Supply Chain Operations. History: Received February 2004; revisions received July 2005, October 2006; accepted November 2006. Published online in Articles in Advance.
1. Introduction
In recent
OPERATIONS RESEARCH
Articles in Advance, pp. 1–19 issn 0030-364X eissn 1526-5463
informs
®
doi 10.1287/opre.1070.0411 © 2007 INFORMS
Pricing and Manufacturing Decisions When Demand Is a Function of Prices in Multiple Periods
Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109, hsahn@umich.edu Desautels Faculty of Management, McGill University, Montréal, Quebec, Canada H3A 1G5, mehmet.gumus@mcgill.ca Department of Industrial Engineering and Operations Research, University of California at Berkeley, Berkeley, California 94720, kaminsky@ieor.berkeley.edu
Hyun-soo Ahn
Mehmet Gümüs ¸
Philip Kaminsky
In most deterministic manufacturing decision models, demand is either known or induced by pricing decisions in the period that the demand is experienced. However, in more realistic market scenarios consumers make purchase decisions with respect to price, not only in the current period, but also in past and future periods. We model a joint manufacturing/pricing decision problem, accounting for that portion of demand realized in each period that is induced by the interaction of pricing decisions in the current period and in previous periods. We formulate a mathematical programming model and develop solution techniques. We identify structural properties of our models and develop closed-form solutions and effective heuristics for various special cases of our models. Finally, we conduct extensive computational experiments to quantify the effectiveness of our heuristics and to develop managerial insights. Subject classifications: inventory/production: uncertainty, deterministic; planning horizons; operating characteristics; marketing: pricing. Area of review: Manufacturing, Service, and Supply Chain Operations. History: Received February 2004; revisions received July 2005, October 2006; accepted November 2006. Published online in Articles in Advance.
1. Introduction
In recent