Price discount and capacity planning under demand postponement with opaque selling

Zhengping Wu, Jianghua Wu

Research output: Contribution to journalArticle

17 Scopus citations

Abstract

Abstract In this paper, we consider the opaque selling strategy of a firm that uses a price discount to induce demand postponement. Under demand postponement, the firm offers a price discount to advance customers in exchange for the option to fulfill their orders after the spot demand has been satisfied. Advance customers who take the discount commit their orders early, but the actual delivery time is chosen by the firm. In effect, the price discount enables the firm to create a capacity buffer for the spot demand. We formulate a two-stage stochastic program, and characterize the firm's optimal capacity and price discount decisions to maximize its expected profit. We find that the driver of demand postponement is that the option to postpone allows the firm to not only use less safety stock to hedge against the risk in the spot demand, but also reduce capacity waste. In addition, the firm might gain from the potentially lower capacity cost for postponed demand. In the event that the advance demand information can be utilized to update the regular demand distribution, the firm can garner additional benefits from information updating through the early orders. Through numerical experiments, we demonstrate the significance of the value of demand postponement and information updating, and assess the impact of market conditions on the firm's optimal capacity and price discount decisions.

Original languageEnglish (US)
Article number12568
Pages (from-to)24-34
Number of pages11
JournalDecision Support Systems
Volume76
DOIs
StatePublished - Jul 14 2015

Keywords

  • Demand management
  • Early order discounts
  • Newsvendor model
  • Opaque selling

ASJC Scopus subject areas

  • Management Information Systems
  • Information Systems
  • Developmental and Educational Psychology
  • Arts and Humanities (miscellaneous)
  • Information Systems and Management

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