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Product Design, Pricing, and Capacity Investment in a Congested Production System

In: Consumer-Driven Demand and Operations Management Models

Author

Listed:
  • Sergio Chayet

    (Washington University in St. Louis)

  • Panos Kouvelis

    (Washington University in St. Louis)

  • Dennis Z. Yu

    (Clarkson University)

Abstract

We investigate a firm’s product positioning and capacity investment problem for a product that is vertically differentiated according to its design quality level. Customers arrive according to a Poisson process and are heterogeneous in the marginal valuation of the product’s quality level, making product choices to maximize a linear utility function of price and quality level. Resulting product demands are met through capacity investments in a production process, which is modeled as a queuing system. Capacity investment and variable production costs are functions of the processed product’s quality. We develop an integrated marketing-operations model that provides insights into the factors determining the right positioning of the product in terms of quality and pricing, the resulting market coverage, and the effects on production costs and congestion levels of the production process.

Suggested Citation

  • Sergio Chayet & Panos Kouvelis & Dennis Z. Yu, 2009. "Product Design, Pricing, and Capacity Investment in a Congested Production System," International Series in Operations Research & Management Science, in: Christopher S. Tang & Serguei Netessine (ed.), Consumer-Driven Demand and Operations Management Models, edition 1, chapter 0, pages 229-251, Springer.
    • Handle: RePEc:spr:isochp:978-0-387-98026-3_9
    DOI: 10.1007/978-0-387-98026-3_9
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    Cited by:

    1. Tang, Christopher S., 2010. "A review of marketing-operations interface models: From co-existence to coordination and collaboration," International Journal of Production Economics, Elsevier, vol. 125(1), pages 22-40, May.

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