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Pricing and Manufacturing Decisions When Demand Is a Function of Prices in Multiple Periods

Hyun-soo Ahn, Mehmet Gümü, Philip Kaminsky

Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Desautels Faculty of Management, McGill University, Montréal, Quebec, Canada H3A 1G5
Department of Industrial Engineering and Operations Research, University of California at Berkeley, Berkeley, California 94720
hsahn{at}umich.edu
mehmet.gumus{at}mcgill.ca
kaminsky{at}ieor.berkeley.edu

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.
History: Received February 2004; revision received October 2006; accepted November 2006.