Dynamic pricing for a production/inventory system in a fluctuating demand environment

by
Fikri Karaesmen
Koc University

We consider dynamic pricing and replenishment decisions for a production/inventory system modeled by a make-to-stock queue.
The potential customer demand is generated by a Markov-Modulated (environment-dependent) Poisson process and the actual demand
depends on the price offered at the time of the transaction. Using a Markov Decision Process framework, we obtain results on the structure
of the optimal replenishment and pricing policies. We also carry out a numerical study in order to assess the potential benefits of dynamic
pricing in different situations. Our results indicate that dynamic pricing is potentially more beneficial in a fluctuating demand environment.