Essays On Joint Optimization Of Pricing And Capacity Decisions With Customer Behavior Modelling.

Abstract

My dissertation is about joint optimization of firms' operations and marketing decisions with explicit modelling of customer behavior. It includes three essays:

The first essay, ``Advance Selling -- The Effect of Capacity and Consumer Valuation Interdependence,'' considers a seller who can offer a product twice, in advance and in spot markets. Customers strategically choose when to purchase the product. Customers' valuations may be inter-dependent and the seller decides on whether, when, and how to sell in advance. I show that customer valuation interdependence dramatically influences firms' strategy. For example, when customers' preferences are diverse, firms typically quote discounted price, but may limit the capacity available in advance. In contrast, when customers' preferences are highly correlated, firms with limited capacity can charge premium price in advance.

The second essay, ``Rationing Capacity in Advance to Signal Quality,'' extends the analysis of advance selling to incorporate asymmetric information regarding product quality: firms usually have better information about products' quality in advance than customers do. I characterize firms' strategy in equilibrium and find that the asymmetry in information always hurts high-quality firms. These firms need to sacrifice some of their potential profit, by lowering price and/or limiting capacity in advance, to signal to customers their high quality.

The third essay, ``Demand Shaping and Product Overselling to Better Match Supply and Demand for Assemble-to-Order Firms,'' focuses on jointly producing and marketing multiple products for assemble-to-order firms, where assembly of final products occurs only after demand arrives and takes negligible time. The key question is how to match final product demand with limited on-hand component inventory. By incorporating customers' price-based demand substitution into firms' decisions, I propose two control strategies, demand shaping and product overselling. I characterize the optimal pricing and order-acceptance policies, and evaluate the benefits of these two strategies both individually and jointly.