Joint product variety, pricing and scheduling decisions in a flexible facility

Abstract

This paper studies a manufacturer’s optimal product variety, pricing and scheduling decisions in a single flexible production facility when customers have private information in their marginal valuations for product qualities. In addition to determining the product variety and price of each product, the manufacturer needs to optimise a detailed schedule of production (batch sizes and production sequences) to fully utilise the flexibility of this facility. To achieve the second-degree discrimination, the manufacturer provides multiple products and follows a priority rule in the production schedule. To obtain economies of scale, the manufacturer may offer a composite product targeting the whole population, or choose a dedicated product to serve a proportion of customers. Comparing these three production choices, we observe that the optimal product variety strategy is threshold controlled by the relative ratio of customer arrival rates, the relative difference between customers’ marginal valuations and the production technology.

Keywords:

• product variety
• pricing
• production scheduling
• vertical differentiation
• flexible facility
• adjustable production rate

Acknowledgements

The authors are grateful for the detailed and insightful comments and suggestions from three referees and the constructive suggestions from the editor. These comments and suggestions have helped us to improve this paper significantly.

Notes

No potential conflict of interest was reported by the authors.

1 In this paper, production technology is jointly reflected by set-up cost, holding cost and unit production cost (following Netessine and Taylor (2007)), with higher production technology corresponding to lower cost.

2 The quality can be considered as a combination of many characteristics of the product (Netessine and Taylor 2007).

3 Apple Inc. changed iPhone’s memory tiers from 16/32/64GB to 16/64/128GB in 2014.

4 According to Seifert (2015) , the most popular iPhone every year is still the one that costs the least: the 16GB one.

5 New 3DS LL and New 3DS are handheld game consoles. Compared with New 3DS LL, New 3DS has smaller screens and a lower price.

6 New 3DS XL has the same tech specs as its counterpart released in Japan – New 3DS LL.

7 A deluxe WiiU bundle includes a deluxe WiiU set preinstalled at least one game.

Additional information

Funding

This work was partially supported by National Natural Sciences Foundation of China [grant number 71271092], [grant number 71511130129], [grant number 71101057].