Dynamic Pricing and Inventory Control: Uncertainty and Competition

In this paper, we study a make-to-stock manufacturing system where two firms compete through dynamic pricing and inventory control. Our goal is to address competition (in particular a duopoly setting) together with the presence of demand uncertainty. We consider a dynamic setting where multiple products share production capacity. We introduce a demand-based fluid model where the demand is a linear function of the price of the supplier and of her competitor, the inventory and production costs are quadratic and all coefficients are time-dependent. A key part of the model is that no backorders are allowed and the strategy of a supplier depends on her competitor’s strategy. First, we reformulate the robust problem as a fluid model of similar form to the deterministic one and show existence of a Nash equilibrium in continuous time. We then discuss issues of uniqueness and address how to compute a particular Nash equilibrium, i.e. the normalized Nash Equilibrium.