Three Essays on Dynamic Production and Pricing Decisions for New Products.

Abstract

This dissertation focuses on dynamic production and pricing issues related to new products. The first essay is focused on the dynamic pricing issue for new product diffusion process when capacity is limited, the second essay is focused on the production lot sizing decisions for a pharmaceutical firm that manufactures new medicines for clinical trial, and the third essay deals with outsourcing decisions when firms manufacture a new product and production costs can be reduced through "learning-by-doing" effect.

The first essay studies the dynamic production, pricing and sales decisions for new products with capacity constraint using control-theory framework. I show that in most of the cases, the optimal trajectory of demand is unimodal, as in the Bass model, but the optimal price trajectory can have multiple local maxima when capacity is limited. I also explore when pricing flexibility is most valuable using a numerical study. I find that benefits are highest when capacity is not unlimited nor very little, and when imitation effect dominates innovation effect. I also find that the capability to adjust prices is significantly more effective than the option of producing in advance and holding inventory.

The second essay is focused on the lot sizing decisions with random yield, rigid demand and significant delay costs in pharmaceutical industry. I model this problem as a lot sizing decision with random yield and rigid demand in an M/G/1 queue environment. I show that the optimal production quantities are increasing in the number of waiting orders and the remaining quantity to be produced for the current lot.

The third essay deals with an outsourcing problem where both Manufacturer and his Supplier may improve their operations and decrease production costs. Such cost reductions, however, require costly effort and are only possible when experimenting with actual production methods. While various reasons have been provided for dual sourcing, I provide a new explanation, which is driven by the fact that in-house production may facilitate learning about potential process improvements leading to eventual cost reductions.