Joint pricing and production decisions for new products with learning curve effects under upstream and downstream trade credits

Abstract

Today's leading companies generate a substantial portion of their sales from new products. For example, Apple Inc. generates almost 60% of its sales revenue from products launched in the past four years. Hence, the importance of new products cannot be overestimated. Pricing strategy is particularly important during the introductory stage of a new product, when the learning curve effect is most pronounced. Although the learning curve effect reduces production cost significantly during the introduction period of a new product, most researchers have assumed that the production cost remains constant throughout a product's lifecycle. In our opinion, failing to consider this learning curve phenomenon may lead to biased solutions. Furthermore, suppliers often offer manufacturers a short-term interest-free loan (i.e., trade credit) to stimulate sales, while manufacturers adjust price to influence consumer purchasing decisions. However, most researchers have not considered the combined effects of pricing strategy on demand, learning curve effect on production cost, and trade credit influence on lot size. Therefore, we propose an inventory model to determine optimal lot-sizing and pricing strategies with both upstream and downstream trade credit, manufacturer's production cost which follows a learning curve effect, and production quantity influenced by both selling price and trade credit. Then we derive the conditions of the optimal solution. Numerical examples and sensitivity analysis are performed to examine results and provide managerial insights. These results show that the learning curve effect significantly lowers selling price, while tremendously increasing both profit and demand.