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DYNAMIC PRICING AND INVENTORY CONTROL FOR A PRODUCTION SYSTEM WITH AVERAGE PROFIT CRITERION

Published online by Cambridge University Press:  30 April 2009

Yifan Xu  and
Xiuli Chao
Yifan Xu
Affiliation:
School of Management, Fudan University, Shanghai 200433, China E-mail: yfxu@fudan.edu.cn
Xiuli Chao
Affiliation:
Department of Industrial and Operations Engineering, University of Michigan, Ann Arbor, MI 48109, E-mail: xchao@umich.edu
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Abstract

In this article we study the joint optimization of finished goods inventory and pricing in a make-to-stock production system with long-run average profit criterion. The production time is random with controllable rate and the demand is Markovian with rate depending on the sale price. The objective is to dynamically adjust the production rate and the sale price to maximize the long-run average profit. We obtain the optimal dynamic pricing and production control policy and present an efficient bisection algorithm for computing the policy parameters.

Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 23 , Issue 3 , July 2009 , pp. 489 - 513
Copyright
Copyright © Cambridge University Press 2009

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