DYNAMIC PRICING AND REPLENISHMENT IN A PRODUCTION-INVENTORY SYSTEM WITH MARKOV-MODULATED DEMAND Submitted to Naval Research Logistics , September 2004

We consider dynamic pricing and replenishment decisions for a production/inventory system modeled by a make-to-stock queue. The potential customer demand is generated by a MarkovModulated (environment-dependent) Poisson process and the actual demand depends on the price offered at the time of the transaction. Using a Markov Decision Process framework, we obtain results on the structure of the optimal replenishment and pricing policies. We also carry out a numerical study in order to assess the potential benefits of dynamic pricing in different situations. Our results indicate that dynamic pricing is potentially more beneficial in a fluctuating demand environment.

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