Production and marketing decisions in a duopolistic market

Official URL: http://risc01.sabanciuniv.edu/record=b1082168 (Table of Contents)

In this thesis, the production - marketing decisions in a duopolistic market are studied. The defined problem consists of two competitor firms and is based on their pricing, advertising and production decisions. Objectives of both firms are assumed to be profit maximization. The proposed solution procedure is based on a cyclic solution in which one of the firms solves its own problem at each step of the cycle. It is assumed that firms forecast their competitor's pricing and advertising decisions and use these data as an input for their own model. The termination condition of the cycle is defined as the equilibrium, where none of the firms changes its pricing and advertising policy significantly as a response to its competitor's decisions. The problem is formulated as a non-linear mixed integer programming (NLMIP) model and two solution methods are employed. First, a commercial package to solve NLMIP problems (GAMS ®) is used. Second, a genetic algorithm (GA) developed to solve the problem is employed. Both of these methods are employed at each step of the solution cycle. The problem is solved for different parametric conditions using both solution methods. Sixteen initial forecasts, combinations of low and high averages and standard deviations of pricing and advertising forecasts of the competitor, are analyzed. Under each of these forecast cases, 5 parameters, price elasticity, cross-price elasticity, advertising lagged effect weights, ratio coefficient for competitors advertising effect, and cross-moving demand are analyzed. The impacts of these parameters on the pricing, advertising, and production decisions of the firms under the sixteen initial forecasts produce similar results. In addition, the demand volumes and the profit values are investigated for these parameters. Price elasticity is observed as the parameter having the greatest impact on decisions, followed by cross-moving demand, advertising lagged effect weights, cross-price elasticity, and ratio coefficient for competitor advertising effect, respectively. Keeping the firm's cost structure constant, competitor's cost structure is changed so as to increase its production cost considerably compared to the previous experiments. Through a set of experiments, the impact of the change in the cost structure on the pricing, advertising and production decisions is investigated. A sensitivity analysis is applied to the logit demand function parameters over a wide range and the results are reported.