Pricing and Capacity Planning for Product-Line Expansion and Reduction

International Journal of Production Research, Vol 55, No 118, doi/10.1080/00207543.2017.1323132

Posted: 9 Mar 2018

See all articles by Birendra K. Mishra

Birendra K. Mishra

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Ashutosh Prasad

University of California, Riverside (UCR)

Dhinu Srinivasan

University of Pittsburgh - Katz Graduate School of Business

Mohsen Elhafsi

University of California, Riverside (UCR)

Date Written: May 7, 2017

Abstract

We investigate optimal pricing and capacity planning decisions for product-line settings such as introducing a new product or dropping an existing one. We consider a two-product, two-period model with stochastic demands, where price and capacity decisions are made at the outset. Investment in capacity must be traded-off against the possibility of buying at higher spot market prices due to shortage in capacity or charging a higher price to manage the demand. Prior studies argue that introducing an additional product to the product-line strains capacity, resulting in an increase in the price of an existing product. In contrast, we find that introducing a new product can also result in a drop in price of an existing product, enabling strategic pricing by firms. The necessary condition for this to occur is that the demand uncertainties for the products are of similar magnitude and negatively correlated. Similar insights are obtained for the setting where an existing product is dropped from the product-line. Hence, product-market decisions and contextual factors play a role in capacity planning, capacity cost allocation and pricing.

Keywords: pricing; capacity planning; cost allocation; new product introduction; product-line; product-market strategy

JEL Classification: M11

Suggested Citation

Mishra, Birendra K. and Prasad, Ashutosh and Srinivasan, Dhinu and Elhafsi, Mohsen, Pricing and Capacity Planning for Product-Line Expansion and Reduction (May 7, 2017). International Journal of Production Research, Vol 55, No 118, doi/10.1080/00207543.2017.1323132. Available at SSRN: https://ssrn.com/abstract=3132891

Birendra K. Mishra (Contact Author)

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-7707 (Phone)
951-827-3970 (Fax)

Ashutosh Prasad

University of California, Riverside (UCR)

900 University Avenue
Riverside, CA 92521
United States

Dhinu Srinivasan

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States
412-648-1513 (Phone)
412-648-1693 (Fax)

Mohsen Elhafsi

University of California, Riverside (UCR) ( email )

900 University Avenue
Riverside, CA 92521
United States
951 827 4557 (Phone)
951 827 3970 (Fax)

HOME PAGE: http://www.agsm.ucr.edu/index2.php?content=contacts/index.html

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