Setting Single-Period Optimal Capacity Levels and Prices for Substitutable Products

Abstract

In this paper, we consider how a company that has the flexibility to produce two substitutable products would determine optimal capacity levels and prices for these products in a single-period problem. We first consider the case where the firm is a price taker but can determine optimal capacity levels for both products. We then consider the case where the firm can set the price for one product and the optimal capacity level for the other. Finally, we consider the case where capacity is fixed for both products, but the firm can set prices. For each case, we examine the sensitivity of optimal prices and capacities to the problem parameters. Finally, we consider the case where each product is managed by a product manager trying to maximize individual product profits rather than overall firm profits and analyze how optimal price and capacity decisions are affected.