Pricing games of duopoly service-inventory systems with lost sales

Abstract

This study considers a duopoly market in which two competitors operate their own service-inventory systems. Both competitors determine their prices to maximize their profit while considering the inventory holding cost, ordering cost, and cost incurred by lost sales. Customers are price sensitive, and customer attractiveness is expressed by arrival rates. We use a game theory approach to formulate and analyze three types of pricing games: (i) a parallel pricing game, (ii) a sequential pricing game, and (iii) a unified pricing game. The uniqueness of equilibrium prices is analytically proven, after which, a solution procedure for obtaining equilibrium prices is outlined.