Capacity Investment and Pricing Decisions in a Single-Period, Two-Product-Problem

Abstract

We consider a profit-maximizing firm that produces two products with a single capacity. The products are characterized by different demand patterns and the initial capacity is allocated such that the entire demand of one product :is satisfied before the other. We develop and analyze a model that determines the optimal initial capacity investment and the selling prices for both products simultaneously. We provide analytical results and develop an algorithm. In a numerical example, we compare this centralized planning approach with decentralized planning where two product managers plan the selling prices and the required production capacity separately but manufacturing produces both products on a common resource. We show that through coordination of pricing and capacity decisions a better capacity utilization can be achieved.