On the Relationship between Price and Capacity Decisions in Inventory Systems with Stochastic Demand

27 Pages Posted: 11 Jun 2006

See all articles by Gad Allon

Gad Allon

University of Pennsylvania - The Wharton School

Assaf Zeevi

Columbia Business School - Decision Risk and Operations

Date Written: March 9, 2006

Abstract

We address the simultaneous determination of pricing and capacity investment strategies in a multi-period setting under demand uncertainty. In our model a monopolistic firm makes three decisions: capacity investment (or disinvestment), production (inventory), and price, all of which can be specified dynamically as a function of the state of the system. We analyze the optimal joint strategy and through that investigate the relationships between the main strategic decision variables: price and capacity. We consider models that allow for either bi-directional price changes or models with markdowns only, and in the latter case we prove that capacity and price are it strategic substitutes.

Keywords: price, capacity, decisions, inventory, systems, stochastic, demand

Suggested Citation

Allon, Gad and Zeevi, Assaf, On the Relationship between Price and Capacity Decisions in Inventory Systems with Stochastic Demand (March 9, 2006). Available at SSRN: https://ssrn.com/abstract=907352 or http://dx.doi.org/10.2139/ssrn.907352

Gad Allon (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Assaf Zeevi

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States
212-854-9678 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www.gsb.columbia.edu/faculty/azeevi/

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