Assessment of the performance of the fair dynamic pricing policy in a completitive market

Official URL: https://risc01.sabanciuniv.edu/record=b3395408

In this thesis, we consider two companies, each modeled as a production/inventory system, that are in a competition while serving the same market. Each company produces a single type of product, which is a substitute of the one produced by its competitor. Demand for a product depends on its price and – when there is no stock – the quoted lead-time as well as what the other company charges and quotes for the substitute product. By modeling each system as an Mn/M/1 type make-tostock queue, we restrict one company to follow a fair dynamic pricing policy while the competitor is unrestricted in this regard. A fair pricing policy stipulates that customers be charged lower prices if they are quoted longer lead times. Yet, both companies are expected to deliver a high proportion of their backlogged products during the lead times they quote. We adapt one policy for both companies, originally considered for a monopoly in the literature, which offers a different price and leadtime bundle depending on the position a customer joins the backlog queue. We develop a simpler alternative policy, more for the company applying fair pricing principles, according to which only two prices are charged: a high price when there is stock and a low price with a single lead-time for all backlogged customers. This problem setting lets us explore if the company sticking to fair pricing principles can survive in the presence of its competitor and if the simple policy can be further preferred.