On the Relationship between Price and Capacity Decisions in Inventory Systems with Stochastic Demand
27 Pages Posted: 11 Jun 2006
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
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