Dynamic Pricing and Production Control of an Inventory System with Remanufacturing

We consider optimal pricing and manufacturing control of a continuous-review inventory system with remanufacturing. Customer demand and product return follow independent Poisson processes. Customer demand is filled by serviceable product, which can be either manufactured or remanufactured from the returned product. The lead times for both manufacturing and remanufacturing are exponentially distributed. The objective is to maximize the expected total discounted profit over an infinite planning horizon. We characterize the structural properties of the optimal policy through the optimality equation. Specifically, the optimal manufacturing policy is a base-stock policy with the base-stock level nonincreasing in the return inventory level. The optimal pricing policy is also a threshold policy, where the threshold level is nonincreasing in the return inventory level.

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