Coordination and optimization of dynamic pricing and production decisions

Abstract : This paper deals with the coordination of the production operations and the pricing strategies. The manager must determine the production planning and selling price at each decision period. The objective is to determine the production operations rationing (production quantities, inventory level and setup operations) as well as pricing policies in order to maximize the profit function of a firm that produces multiple products intended for multiple markets. This problem is formulated as a mixed integer nonlinear model with considering different constraints such as: production capacity, setup costs, and demand seasonality. The demand function of each product is assumed be continuous and strictly decreasing according to the prices. An optimization algorithm, based on the outer approximation methodology, is also presented. The effectiveness of the constant and dynamic pricing policies is comparatively analyzed based on some numerical instances inspired by the literature. The numerical study also shows that the proposed algorithm outperforms the commercial solver in terms of solution quality and computational times.