Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility

40 Pages Posted: 15 Apr 2012 Last revised: 18 Oct 2017

See all articles by Oben Ceryan

Oben Ceryan

Cass Business School, City, University of London

Ozge Sahin

Johns Hopkins University - Carey Business School

Izak Duenyas

University of Michigan, Stephen M. Ross School of Business

Date Written: April 1, 2012

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 as 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.

Keywords: Dynamic Pricing, Substitutable Products, Flexible Capacity, Revenue Management, Inventory Control

JEL Classification: C61, M11

Suggested Citation

Ceryan, Oben and Sahin, Ozge and Duenyas, Izak, Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility (April 1, 2012). Ross School of Business Paper. Available at SSRN: https://ssrn.com/abstract=2039771 or http://dx.doi.org/10.2139/ssrn.2039771

Oben Ceryan (Contact Author)

Cass Business School, City, University of London ( email )

London
United Kingdom

Ozge Sahin

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Izak Duenyas

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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