Pricing decisions during inter-generational product transition

Hongmin Li, Stephen C. Graves

Research output: Contribution to journalArticle

26 Scopus citations

Abstract

How should companies price products during an inter-generational transition? High uncertainty in a new product introduction often leads to extreme cases of demand and supply mismatches. Pricing is an effective tool to either prevent or alleviate these problems. We study the optimal pricing decisions in the context of a product transition in which a new-generation product replaces an old one. We formulate the dynamic pricing problem and derive the optimal prices for both the old and new products. Our analysis sheds light on the pattern of the optimal prices for the two products during the transition and on how product replacement, along with several other dynamics including substitution, external competition, scarcity, and inventory, affect the optimal prices. We also determine the optimal initial inventory for each product and discuss a heuristic method.

Original languageEnglish (US)
Pages (from-to)14-28
Number of pages15
JournalProduction and Operations Management
Volume21
Issue number1
DOIs
StatePublished - Jan 1 2012

Keywords

  • dynamic pricing
  • multinomial logit model
  • new product introduction
  • product transition

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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