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A Nonlinear Continuous Time Optimal Control Model of Dynamic Pricing and Inventory Control with No Backorders
 

Summary: A Nonlinear Continuous Time Optimal Control Model of Dynamic Pricing
and Inventory Control with No Backorders
Elodie Adida,1
Georgia Perakis2
1
Department of Mechanical and Industrial Engineering, University of Illinois at Chicago, Chicago, Illinois
2
Sloan School of Management, MIT, Cambridge, Massachusetts
Received 12 December 2006; revised 28 May 2007; accepted 2 June 2007
DOI 10.1002/nav.20250
Published online 19 July 2007 in Wiley InterScience (www.interscience.wiley.com).
Abstract: In this paper, we present a continuous time optimal control model for studying a dynamic pricing and inventory con-
trol 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 54: 767795, 2007
Keywords: pricing; inventory control; optimal control
1. INTRODUCTION

  

Source: Adida, Elodie - Department of Mechanical and Industrial Engineering, University of Illinois at Chicago

 

Collections: Engineering