DYNAMIC INTERACTION OF PRICE AND DESIGN QUALITY FOR PRODUCTS WITH CONVEX PRODUCTION COSTS

Price and design quality define value for customers and are often used by firms to position products in the marketplace. Setting price and quality level on a new product for the first time and making appropriate changes over time to these variables to reflect changing conditions in the market requires careful coordination of design, manufacturing, and marketing variables. We present a control theoretic model to study the complex interaction among price, quality, and cost during the life cycle of a product. Our model considers the major design-manufacturing-marketing tradeoffs and helps determine optimal pricing, design quality, and production strategies in a dynamic environment with convex production costs.     

EFFECTS OF INTEGRATING ORDER/BACKORDER QUANTITY AND PRICING DECISIONS

We consider a monopolistic situation where the retailer aims to find the profit-maximizing selling price, and the order and backorder quantity of an item. The price and demand are assumed to be inversely related. We develop a simple optimal approach, the proportion-balancing algorithm (PBA), which utilizes the proportions of cost components to sales revenue. We demonstrate that the PBA can handle three commonly used demand functions. However, applicability of the PBA depends on how the price-demand relationship is specified. A sensitivity analysis shows that the effects of changes in cost parameters on the order and backorder quantities can be very different from those of the classical economic order quantity model with backorders.     

PRODUCTION SMOOTHING UNDER ENVIRONMENTAL CONSTRAINTS

This is an investigation into how optimal production rates and optimal price levels react to the introduction of an environmental tax on emissions. While, in the case of perfect competition, a linear tax has no effect, I show that in the monopolistic case the optimal production and emissions rates decrease in all instances-without an additional smoothing effect. The desirable effect, emissions peaks being cut off, is only achieved when a progressive tax is imposed.     

A TUTORIAL ON BOTTLENECK DYNAMICS: A HEURISTIC SCHEDULING METHODOLOGY

We give a tutorial on bottleneck dynamics. Bottleneck dynamics is a scheduling framework that uses approximate dual resource prices to make decentralized decisions. The basic idea is to establish a price for a resource as a function of the set of jobs that need to be processed by the resource. Tasks are then sequenced according to a cost/benefit ratio. Starting with one resource sequencing problems, we describe how priorities for jobs can be developed and how they translate into resource prices. We then describe how resource prices can be approximated in a multiresource situation and how lead times which are critical for these approximations can be accurately computed. We also describe a number of studies that have shown bottleneck dynamics to be an effective approach in several different problem areas.     

THE BENEFITS OF OPTIMIZING PRICES TO MANAGE DEMAND IN HOTEL REVENUE MANAGEMENT SYSTEMS

We investigate the revenue impact of a new Price Setting Method (PSM) and compare it with the industry standard Bid Price Method (BPM). This comparison is performed via a simulation that was validated by a major hotel chain. In 27 out of the 32 cases, the PSM outperformed the BPM based on statistically significant tests. The PSM produces an average revenue increase of 34%, which can be thought of as an upper bound on the realistic revenue increase.     

RELIABILITY-CONSTRAINED PRICING,CAPACITY, AND QUALITY: AN ILLUSTRATION OF ECONOMIC CONCEPTS TO POSTAL SERVICES

A model is developed from which welfare-optimal prices, capacities, and reliabilities for a service provider are simultaneously determined. Solutions are determined under conditions of stochastic demand subject to a reliability constraint on service quality. Both quality of service provided, as well as price, impact on demand for services rendered. Results indicate that (i) optimal prices are equated to the reliability-constrained marginal costs, (ii) optimal reliabilities require that the marginal benefits of increasing reliability are equated to the marginal costs of doing so, and (iii) optimal capacity allocation involves minimizing the system's expected costs subject to meeting the prespecified reliability constraint for service quality. The model is applied to postal delivery services in light of the growing competition that has emerged in this industry.     

PRODUCT OFFERING,PRICING, AND MAKE‐TO‐STOCK/MAKE‐TO‐ORDER DECISIONS WITH SHARED CAPACITY

In an era of mass customization, many firms continue to expand their product lines to remain competitive. These broader product lines may help to increase market share and may allow higher prices to be charged, but they also cause challenges associated with diseconomies of scope. To investigate this tradeoff, we considered a monopolist who faces demand curves, which for each of its potential products, decline with both price and response time (time to deliver the product). The firm must decide which products to offer, how to price them, whether each should be make‐to‐stock (mts) or make‐to‐order (mto), and how often to produce them. The offered products share a single manufacturing facility. Setup times introduce disceonomies of scope and setup costs introduce economies of scale. We provide motivating problem scenarios, model the monopolist's problem as a non‐linear, integer programming problem, characterize of the optimal policy, develop near‐optimal procedures, and discuss managerial insights.     

PRICE‐DEPENDENT INVENTORY MODELS WITH DISCOUNT OFFERS AT RANDOM TIMES*

We consider an inventory model with a supplier offering discounts to a reseller at random epochs. The offer is accepted when the inventory position is lower than a threshold level. We compare three different pricing policies in which demand is induced by the resellers price variation. Policy 1 is the EOQ policy without discount offers. Policy 2 is a uniform price, stock‐independent policy. Policy 3 is a stock level‐dependent, discriminated price policy. Assuming constant demand rates, expressions are obtained for the optimal order quantities, prices, and profits. The numerical experiments show that if it is better to accept a suppliers discount, then it benefits the reseller to transfer the discount to downstream customers.     

TIME‐BASED PRICING AND LEADTIME POLICIES FOR A BUILD‐TO‐ORDER MANUFACTURER

We studied time‐based policies on pricing and leadtime for a build‐to‐order and direct sales manufacturer. It is assumed that the utility of the product varies among potential customers and decreases over time, and that a potential customer will place an order if his or her utility is higher than the manufacturer's posted price. Once an order is placed, it will be delivered to the customer after a length of time called “leadtime.” Because of the decrease in a customer's utility during leadtime, a customer will cancel the order if the utility falls below the ordering price before the order is received. The manufacturer may choose to offer discounted prices to customers who would otherwise cancel their orders. We discuss two price policies: common discounted price and customized discounted price. In the common discounted price policy, the manufacturer offers a single lower price to the customers; in the customized discounted price policy, the manufacturer offers the customers separately for individual new prices. Our analytical and numerical studies show that the discounted price policies results in higher revenue and that the customized discounted price policy significantly outperforms the common discounted price policy when product utility decreases rapidly. We also study two leadtime policies when production cost decreases over time. The first uses a fixed leadtime, and the second allows the leadtime to vary dynamically over time. We find that the dynamic leadtime policy significantly outperforms the fixed leadtime policy when the product cost decreases rapidly.