Abstract
We construct and analyze an economically efficient way of pricing and allocating semiconductor chips of which production technology is characterized by persistent quality variations and of which production capacity is exceeded by potential demand. In our model, specification levels and allocation priorities of competing orders from customers are systematically determined for a single profit maximizing producer. In the proposed scheme, the producer offers a ‘product line’ of priority classes under an allocation rule that always supplies higher priority classes with higher spec, level chips. This product line design and allocation rule enable us to cast the producer's profit maximization problem as a nonlinear programming formulation. Also, we investigate the optimality of the proposed allocation rule and derive conditions under which the profitability of downgrading is determined.
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