Optimal product and after-sales service decisions considering risk attitudes under price-dependent uncertain demand

Abstract

In this paper, we investigate a service-oriented manufacturer that provides fashionable products with after-sales services to customers. Before the selling season, the manufacturer invests in service capacity in advance and then decides on the production quantity and selling price based on updated demand information. Interestingly, it is found that the manufacturer’s production and pricing decisions will not be affected by the unit production cost when the market base exceeds a threshold. We investigate and compare the manufacturer’s decisions in two cases: imperfect and perfect demand information updates. The selling price in the imperfect demand updates case is always set lower than that in the perfect demand updates case when the service capacity is sufficient but may not be under insufficient service capacity. The possibility that the prepared service capacity limits the production quantity may decrease with the unit production cost in the imperfect demand updates case. In contrast, this possibility is invariant with the unit production cost in the case of perfect demand updates. The effects of risk aversion are also investigated. It is found that under the conditional value-at-risk (CVaR) criterion, the manufacturer with a higher risk-averse degree establishes a lower service capacity and sets a lower selling price.