Dynamic pricing with uncertain production cost: An alternating-move approach

•This paper considers the game between two competing firms.•External factors are considered including production cost that is random in nature.•Based on the model setting, an alternating-move approach is used to solve this problem.•A closed-form solution is provided for special cases•A comprehensive...

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Bibliographic Details
Published in:European journal of operational research 2014-07, Vol.236 (1), p.218-228
Main Authors: Sibdari, Soheil, Pyke, David F.
Format: Article
Language:English
Subjects:
Alternating-move game
Cost uncertainty
Decision making models
Dynamic pricing
Dynamic tests
Dynamics
Game theory
Games
Industrial engineering
Manufacturing engineering
Mathematical analysis
Mathematical problems
Pricing
Pricing policies
Production costs
Random variables
Studies
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Summary:•This paper considers the game between two competing firms.•External factors are considered including production cost that is random in nature.•Based on the model setting, an alternating-move approach is used to solve this problem.•A closed-form solution is provided for special cases•A comprehensive numerical study is provided to illustrate the results. This article studies a two-firm dynamic pricing model with random production costs. The firms produce the same perishable products over an infinite time horizon when production (or operation) costs are random. In each period, each firm determines its price and production levels based on its current production cost and its opponent’s previous price level. We use an alternating-move game to model this problem and show that there exists a unique subgame perfect Nash equilibrium in production and pricing decisions. We provide a closed-form solution for the firm’s pricing policy. Finally, we study the game in the case of incomplete information, when both or one of the firms do not have access to the current prices charged by their opponents.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2013.10.070