Optimal Policies Under Different Pricing Strategies in a Production System with Markov-Modulated Demand

Abstract

We study the effects of different pricing strategies available to a continuous review inventory system with capacitated supply, which operates in a fluctuating environment. The system has a single server with exponential processing time. The inventory holding cost is nondecreasing and convex in the inventory level, the production cost is linear with no set-up cost. The potential customer demand is generated by a Markov-Modulated (environment-dependent) Poisson process, while the actual demand rate depends on the offerred price. For such systems, there are three possible pricing strategies: Static pricing, where only one price is used at all times, environment-dependent pricing, where the price changes with the environment, and dynamic pricing, where price depends on both the current environment and the stock level. The objective is to find an optimal replenishment policy under each of these strategies. This paper presents some structural properties of optimal replenishment policies, and a numerical study which compares the performances of these three pricing strategies.