Production planning, pricing and market coordination for news vendor problem with price dependent demand
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Randomness is a common and yet quite an expensive challenge that every manufacturing and marketing system faces. In this research we focus on products for which the malfunction likelihood of the production outputs are not independent of one another, such as flu vaccine and semiconductors. Production has random yield that is interpreted as the ratio of the faultless items in a production batch. We also assume that these products have a limited marketing season, suggesting the news-vendor model with randomness on the supply side is an outstanding platform to analyze the production and marketing processes of such products. Our base model studies a single manufacturer present in a single market, where the manufacturer dynamically selects the production commitment and the price at the beginning of the production season and marketing season, accordingly. Also, we assume that demand is deterministic but price dependent. For strategically important products such as the flu vaccine, the government may find it necessary to intervene in the pricing or manufacturing process in order to coordinate the market. The need for coordinating the market may also be met by other consumer interest groups such as distribution channel owners, think-tanks or policy making agencies. We incorporate the presence of a social planner in our model by studying the centralized case and the socially optimum production commitment and pricing schema. The challenge is to find contracts that can set the conditions for the manufacturer in a way that his optimum production and pricing policy is exactly the same as the one of the social planner. Our study introduces three contracts that can coordinate the market. In the second phase of this research, we study the same problem for the cases where there are two symmetrical manufacturers with inter-dependent demands. By the third phase, we study the case with one manufacturer who has the option to provide the product to two different markets with different characteristics. Our study shows that production commitment is smaller if there is no randomness and the yield ratio is known. We also show that the production commitment of the centralized setting can be either less or more than the production commitment of the decentralized setting, depending on the salvage cost. Numerical analysis, managerial insights, and conclusions are presented at the end of each chapter.