Price and Lead time Disclosure Strategies in Inventory Systems

We consider a firm that faces the following pricing and leadtime disclosure decision. Either, (i) offer the same price to all arriving customers and disclose no leadtime information, in which case customers know only an expected leadtime, or, (ii) vary the price dynamically based on the current inventory status, and disclose leadtime information dynamically. The second option allows the firm to offer a price discount for a long leadtime, and to offer a short leadtime when it has a large inventory. In order to determine which pricing and leadtime disclosure policy attains higher maximum profit, we formulate and solve a Markov decision problem for each policy and compare the two solutions. The comparison suggests that, typically, there is a critical inventory level, above which static pricing and no leadtime disclosure yields higher profit, and, below that level, dynamic pricing and leadtime disclosure yields a higher profit. We also identify certain situations where the static policy leads to profits at least as large as those under the dynamic policy for any state, and we examine the price differences between the two policies. Finally, the structure of the solution is similar to the situation where the system manager can pause the production process, except that now this extra lever partly mitigates the superiority of the static policy.