A Dynamic Pricing Model for Coordinated Sales and Operations

42 Pages Posted: 11 Nov 2005

See all articles by David F. Pyke

David F. Pyke

School of Business Administration, University of San Diego

Joseph M. Hall

Tuck School of Business at Dartmouth

Moritz Fleischmann

University of Mannheim, Business School

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Date Written: November 8, 2005

Abstract

Recent years have seen advances in research and management practice in the area of pricing, and particularly in dynamic pricing and revenue management. At the same time, researchers and managers have made dramatic improvements in operations and supply chain management. The interactions between pricing and operations/supply chain performance, however, are not as well understood. In this paper, we examine this linkage by developing a deterministic, finite-horizon dynamic programming model that captures a price/demand effect as well as a stockpiling/consumption effect - price and market stockpile influence demand, demand influences consumption, and consumption influences the market stockpile. The decision variable is the unit sales price in each period. Through the market stockpile, pricing decisions in a given period explicitly depend on decisions in prior periods. Traditional operations models typically assume exogenous demand, thereby ignoring some of the market dynamics. Herein, we model endogenous demand, and we develop analytical insights into the nature of optimal prices and promotions. We develop conditions under which the optimal prices converge to a constant. In other words, price promotion is suboptimal. We also analytically and numerically illustrate cases where the optimal prices vary over time. In particular, we show that both revenue effects, due to nonlinear market responses to prices and/or inventory, and cost effects, due to economies of scale in operations may drive price dynamics. The paper concludes with a discussion of directions for future research.

Suggested Citation

Pyke, David F. and Hall, Joseph M. and Fleischmann, Moritz, A Dynamic Pricing Model for Coordinated Sales and Operations (November 8, 2005). Tuck School of Business Working Paper No. 2005-25. Available at SSRN: https://ssrn.com/abstract=845826 or http://dx.doi.org/10.2139/ssrn.845826

David F. Pyke (Contact Author)

School of Business Administration, University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States
619-260-4886 (Phone)

Joseph M. Hall

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

Moritz Fleischmann

University of Mannheim, Business School ( email )

University of Mannheim
P.O. Box 10 34 62
Mannheim, 68131
Germany

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