Pricing and capacity planning for product-line expansion and reduction

Birendra K. Mishra, Ashutosh Prasad, Dhinu Srinivasan and Mohsen ElHafsi

International Journal of Production Research, 2017, vol. 55, issue 18, 5502-5519

Abstract: We investigate optimal pricing and capacity planning decisions for product-line settings such as introducing a new product or dropping an existing one. We consider a two-product, two-period model with stochastic demands, where price and capacity decisions are made at the outset. Investment in capacity must be traded-off against the possibility of buying at higher spot market prices due to shortage in capacity or charging a higher price to manage the demand. Prior studies argue that introducing an additional product to the product-line strains capacity, resulting in an increase in the price of an existing product. In contrast, we find that introducing a new product can also result in a drop in price of an existing product, enabling strategic pricing by firms. The necessary condition for this to occur is that the demand uncertainties for the products are of similar magnitude and negatively correlated. Similar insights are obtained for the setting where an existing product is dropped from the product-line. Hence, product-market decisions and contextual factors play a role in capacity planning, capacity cost allocation and pricing.

Date: 2017
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/00207543.2017.1323132 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:tprsxx:v:55:y:2017:i:18:p:5502-5519

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/TPRS20

DOI: 10.1080/00207543.2017.1323132

Access Statistics for this article

International Journal of Production Research is currently edited by Professor A. Dolgui

More articles in International Journal of Production Research from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().