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Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility

Ceryan, O. ORCID: 0000-0002-7298-9781, Sahin, O. and Duenyas, I. (2012). Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility. Manufacturing & Service Operations Management, 15(1), pp. 86-101. doi: 10.1287/msom.1120.0404

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.

Publication Type: Article
Publisher Keywords: pricing and revenue management, dynamic pricing, capacity flexibility, inventory control, substitutable products
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Departments: Cass Business School > Management
URI: http://openaccess.city.ac.uk/id/eprint/20879
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