Managing Demand and Supply for Multiple Products through Dynamic Pricing and Capacity Flexibility

Virtually all manufacturing and service industries are susceptible to periods of supply and demand mismatches. Due to capacity limitations and demand uncertainties, firms producing multiple products may frequently encounter instances where one of their products faces shortages while the other has excess inventories. In order to alleviate the level of such inventory mismatches, several tools may be utilized to either alter supply or demand. Our focus in this paper will be a joint analysis of two of these mechanisms, namely, dynamic pricing and capacity flexibility. We consider a firm that produces two substitutable products with price-correlated demands, implementing a dynamic pricing strategy. Further, the firm employs capacitated product-dedicated resources for each product as well as a flexible resource that may be used to produce either product. We are interested in the firm’s optimal pricing and production policies and how the availability of a flexible resource influences the dynamic pricing strategy.