Title: Maximisation of long-run average profit through dynamic control of production and pricing in a manufacturing system

Authors: Yifan Xu, Hongyu Li

Addresses: School of Management, Fudan University, Shanghai, 200433, China. ' School of Management, Fudan University, Shanghai, 200433, China

Abstract: This paper concerns the joint management problem of production control and dynamic pricing to balance the finished goods inventory and market demand in a make-to-stock manufacturing system using a long-run average profit criterion. In the system, the production rate is random, with a controllable mean rate, and the demand is Markov, with a changeable mean rate which depends on the sale price. The management issue is how to dynamically adjust the production rate and the selling price to maximise the long-run average profit. We discover that the optimal policy of dynamic pricing and production control over an infinite horizon is a matter of thresholds. An effective algorithm is suggested.

Keywords: make-to-stock production; Poisson demand; finished goods inventory management; production control; dynamic pricing; revenue management; long-run average profit; manufacturing.

DOI: 10.1504/IJRM.2008.020625

International Journal of Revenue Management, 2008 Vol.2 No.3, pp.272 - 286

Published online: 05 Oct 2008 *

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