This Article Full Text (PDF) e-companion References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Tomlin, B. Articles by Wang, Y. Search for Related Content

Pricing and Operational Recourse in Coproduction Systems

Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599
W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
brian_tomlin{at}unc.edu
yimin_wang{at}asu.edu

Coproduction systems, in which multiple products are produced simultaneously in a single production run, are prevalent in many industries. Such systems typically produce a random quantity of vertically differentiated products. This product hierarchy enables the firm to fill demand for a lower-quality product by converting a higher-quality product. In addition to the challenges presented by random yields and multiple products, coproduction systems often serve multiple customer classes that differ in their product valuations. Furthermore, the sizes of these classes are uncertain. Employing a utility-maximizing customer model, we investigate the production, pricing, downconversion, and allocation decisions in a two-class, stochastic-demand, stochastic-yield coproduction system. For the single-class case, we establish that downconversion will not occur if prices are set optimally. In contrast, we show that downconversion can be optimal in the two-class case, even if prices are set optimally. We consider the benefit of postponing certain operational decisions, e.g., the pricing or allocation-rule decisions, until after uncertainties are resolved. We use the term recourse to denote actions taken after uncertainties have been resolved. We find that recourse pricing benefits the firm much more than either downconversion or recourse allocation do, implying that recourse demand management is more valuable than recourse supply management. Special cases of our model include the single-class and two-class random-yield newsvendor models.

Key Words: flexibility; random yield; utility-maximizing customers
History: Received: May 25, 2005;

This article has been cited by other articles:

				R. A. Shumsky and F. Zhang Dynamic Capacity Management with Substitution Operations Research, May 1, 2009; 57(3): 671 - 684. [Abstract] [PDF]