Seminar (Dept. of Management Science and Engineering)

Theme：Effects of production capacity and substitutability on optimal pricing and inventory policies

Speaker：Zepeng Wang (School of Business, Renmin University of China)

Time：2021-05-26 10:30

Address：Room 706, Mingde Business Building

Language：Chinese

ABSTRACT：

To formulate the best production strategy, manufacturers have to deal with demand uncertainty and capacity constraints. We investigate the impact of production capacity and product substitutability on the optimal prices, optimal quantity, and profit, when the manufacturer faces uncertain demand. We employ a stochastic model of a monopolistic manufacturer, whose capacity is limited, selling two types of substitutable products: high- and low-end products. We then develop an expected profit function and solve for the optimal prices, safety stock, and expected profit. Additionally, we investigate how the manufacturer allocates her capacity, and use a cost function related to substitutability to extend our basic model and investigate how substitutability affects the optimal decision. The findings show that when the price difference between two products is not significant, a higher degree of substitution increases the price of high-end products as well as the expected profit. Moreover, tight capacity results in higher prices and lower levels of safety stock. Furthermore, there is an optimal value of substitutability to maximise the expected profit, which increases with the cost of high-end products, but decreases with the capacity constraint.