Dynamic Pricing and Inventory Control in a Make-to-Stock Queue With Information on the Production Status

: This paper addresses the dynamic pricing problem of a single-item, make-to-stock production system. Demand arrives according to Poisson processes with changeable arrival rate dependent on the selling price. Item processing times follow an Erlang distribution, which allows to use the information on the production status in a tractable way. The objective is to identify a dynamic control policy that decides production and adjusts the price to maximize the long-run total discounted profit. An optimal policy is identified, which is based on the socalled work-storage level that captures both the inventory level and information on the status of on-going production process. Specifically, we show that 1) the finished goods inventory is optimally managed by a critical stage level policy: when the inventory is below a certain workstorage level, production is started if the system is currently idle; and 2) the price is optimally set by threshold levels: a certain price is posted when the wor...

• Type: Journal
• Year: 2011
• Where: TASE
• Authors: Liuxin Chen, Youhua Chen, Zhan Pang
• Keywords: Dynamic Pricing, Optimal Policy, Software Engineering, TASE 2011, Work-storage Level