Demand Risk The Power of Flexibility via Responsive Pricing

5 Demand Risk The Power of Flexibility via Responsive Pricing 

To this point, we have focused on operational flexibilities such as maintaining multiple suppliers or configuring plants to be capable of processing multiple products. We now turn to a marketing flexibility, namely the flexibility of delaying the time at which prices must be set. While van Mieghem and Dada (1999) study the benefit of complete price postponement, we want to investigate the value of hmited flexibility, or in other words, partial price postponement. 

Consider the case in which the manufactnrer and the retailer are both owned and controlled by a single firm. We also assnme that the manufacturer has the capacity to meet the actual demand of each prodnct over the selling season that starts after period T. In this integrated snpply chain, the unit cost of each product i is given as c and we only need to decide on p(, e.g., the retail price of each product i. (The wholesale price is determined internally between the manufacturer and the retailer.) Suppose that the firm has the flexibility to set and announce the retail price of each product i at the end of period f, where/= 1,. .., T. Once the retail price is announced, we assume that the firm is committed to sell each product atpi during the selling season that starts after period T. This implies that the firm must announce the actual retail price no later than the end of period T. 

---