Pricing, service and preservation technology investments policy for deteriorating items under common resource constraints

Abstract

This paper addresses a joint pricing, preservation technology investment, replenishment cycle and dynamic service investment problem for deteriorating items under a common resource constraint with respect to preservation technology and service investments. The evolution of service level is considered to characterize the indirect positive effect of service investment on demand. The analytical solution for dynamic service investment is first obtained under the given sales price, preservation technology and replenishment cycle by solving an optimal control problem. An algorithm is then designed to generate the optimal joint pricing, preservation technology investment, service investment and replenishment policy to maximize the total profit per unit time. Further, a numerical example is presented to illustrate the main theoretical results and the effectiveness of the algorithm, and sensitivity analysis about key parameters is conducted to obtain managerial insights. The impact of common resource constraint on the optimal investment policy is investigated, implying that for a relatively low common resource capacity, the firm prefers to invest in service improvement rather than preservation technology.