Title: Joint pricing and rationing in a production system with two demand classes

Authors: Mehdi Ahmadi; Hassan Shavandi

Addresses: Department of Industrial Engineering, Sharif University of Technology, P.O. Box 11365-8639, Tehran, Iran ' Department of Industrial Engineering, Sharif University of Technology, P.O. Box 11365-8639, Tehran, Iran

Abstract: We consider a production system with a single product and two classes of customers. Customers are segmented into two classes: 1) loyal and 2) occasional. Each class has a different shortage cost for the system. The demand of the customer classes is assumed to be stochastic and price sensitive, and distributed as a Poisson process. The objective is to determine the inventory rationing as well as pricing policies in order to maximise the profit function of the system. We formulate the problem as a Markov decision problem and characterise the optimal policies for pricing and inventory rationing. The joint pricing and rationing threshold policy is shown to be optimal. The performance of the optimal and non-optimal policies is comparatively analysed using a numerical study. [Received 1 May 2012; Revised 28 August 2012; Revised 31 March 2013; Accepted 2 September 2013]

Keywords: revenue management; inventory rationing; pricing policies; available prices; demand classes; loyal customers; occasional customers; shortage costs.

DOI: 10.1504/EJIE.2014.066939

European Journal of Industrial Engineering, 2014 Vol.8 No.6, pp.836 - 860

Available online: 15 Jan 2015 *

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