A nonlinear continuous time optimal control model of dynamic pricing and inventory control with no backorders |
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| Authors: | Elodie Adida Georgia Perakis |
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| Institution: | 1. Department of Mechanical and Industrial Engineering, University of Illinois at Chicago, Chicago, Illinois;2. Sloan School of Management, MIT, Cambridge, MassachusettsSloan School of Management, MIT, Cambridge, Massachusetts |
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| Abstract: | In this paper, we present a continuous time optimal control model for studying a dynamic pricing and inventory control problem for a make‐to‐stock manufacturing system. We consider a multiproduct capacitated, dynamic setting. We introduce a demand‐based model where the demand is a linear function of the price, the inventory cost is linear, the production cost is an increasing strictly convex function of the production rate, and all coefficients are time‐dependent. A key part of the model is that no backorders are allowed. We introduce and study an algorithm that computes the optimal production and pricing policy as a function of the time on a finite time horizon, and discuss some insights. Our results illustrate the role of capacity and the effects of the dynamic nature of demand in the model. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007 |
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| Keywords: | pricing inventory control optimal control |
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