Dynamic pricing in a production system with multiple demand classes

Abstract

This paper considers dynamic pricing in a production system with a single product which is demanded by several customer classes. We seek the structure of the optimal policy assuming m available prices and n demand classes that differ based on the lost sales cost they impose on the system. The assumption of different available prices leads to dynamic pricing structure and the assumption of several demand classes leads to rationing which is proposed in the literature of revenue management. We found that an optimal policy structure exists for this combined problem. The optimal policy has a threshold form which lower thresholds are related to the rationing decision and upper thresholds are related to pricing decision.