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Capacity commitment and pricing for substitutable products under competition

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Abstract

Capacity acquisition and pricing decisions are a company’s long-term strategic decisions. However, demand uncertainty and substitutability of multiple products cause the difficulty to solve capacity and pricing decision problems. In this paper, we address a multiple product pricing and multiple resource capacity acquisition problem with demand uncertainties and competition. The company needs to determine capacity commitment for each resource and product prices before demands are realized so that the total profit is maximized. If the demand exceeds the committed capacity, extra amounts can be purchased from the spot market. Variable unit production costs, capacity acquisition and maintenance costs are considered. We first analyze a single company basic problem and find the optimal solutions on prices and capacity. Based on the single company model, we address the two-product, two-firm capacity commitment and pricing problem considering across product and across company price competition factors. The existence and uniqueness of equilibrium on price and capacity commitment are proved, and then we extended the results to the multiple product, multiple company case.

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Authors and Affiliations

  1. Business and Social Science School, Aarhus University, 8210, Aarhus V, Denmark

    Hongyan Li

  2. School of Business Administration, Northeastern University, Shenyang, 110819, China

    Hongyan Li & Tianhui You

Authors
  1. Hongyan Li
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  2. Tianhui You
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Corresponding author

Correspondence to Tianhui You.

Additional information

This research was partly supported by National Nature Science Foundation of China (71101021 and 71271049), Post-Doctor Science Foundation of China (20110490144), and Humanities and Society Science Plan Foundation of Ministry of Education of China (11YJA630180).

Hongyan Li received B.E. degree in statistics from Northeastern University (NEU), Shenyang, China in 1997, M.S. degree in Management Science and Engineering from NEU in 2000, and Ph.D. degree from Lancaster University Management School, Lancaster University, UK, 2007. She is currently an associate professor at the Department of Management Science and Engineering, School of Business Administration in NEU. Her primary research interests are in supply chain management and revenue management. She is also a member of INFORMS and POMS, and has publish a number of papers in internationally recognized journals in OR area.

Tianhui You received the B.E. degree in science and technology information engineering from Jilin University of Technology, Changchun, China in 1990, the M.S. degree in enterprise management from Northeastern University (NEU), Shenyang, China in 1998, and Ph.D. degree in management science and engineering from NEU in 2004. She is currently an associate professor in the Department of Management Science and Engineering, School of Business Administration, NEU. Her current research interests include decision analysis, knowledge management and operations research.

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Li, H., You, T. Capacity commitment and pricing for substitutable products under competition. J. Syst. Sci. Syst. Eng. 21, 443–460 (2012). https://doi.org/10.1007/s11518-012-5204-3

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  • DOI: https://doi.org/10.1007/s11518-012-5204-3

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