Example 16-1 Pricing to Multiple Segments

Differential Pricing Constant Pricing w/o ca

Production Capacity = 4,000
Segment Price Demand Profit Segment
1 $141.7 2,166.67 $285,277.8 1
2 $79.2 1,833.33 $126,805.6 2
Total 4,000.00 $412,083.3 Total
Differential Pricing Constant Pricing
Demand curve for segment 1: 5,000 - 20p1 Demand curve for segment 1
Demand curve for segment 2: 5,000 - 40p2 Demand curve for segment 2

Unconstrained Pricing Change price in Cell G5 to max

Set production capacity in Cell B3 to be 5,000 units and run profit in Cell I7. Profit is maxim
Solver to maximize total profits from two segments in price of 88.33 without a capac
Cell D7.

Constrained Pricing
Set production capacity in Cell B3 to be 4,000 units and run
Solver to maximize total profits from two segments in
Cell D7.
onstant Pricing w/o capacity constraint

Price Demand Profit

$88.33 3,233.40 $253,272
$88.33 1,466.80 $114,894
4,700.20 $368,167
onstant Pricing

emand curve for segment 1: 5,000 - 20p

emand curve for segment 2: 5,000 - 40p

hange price in Cell G5 to maximize total

ofit in Cell I7. Profit is maximized at a
ice of 88.33 without a capacity constraint.
Example 16-2 Allocating Capacity to Uncertain Demand from Multiple Segments

Revenue/cu. ft. from Segment A pA $ 3.50

Revenue/cu. ft. from Segment B pB $ 2.00
Mean demand for segment A DA 3,000.00
Standard deviation of demand for segment A σA 1,000.00

Capacity reserved for segment A CA 2,820

Initially set the revenue from the high-priced segment (A) in Cell C3 to $3.50.
The capacity to be reserved for the higher-priced segment A is calculated in
Cell C8.

Change the revenue that segment A is willing to pay in Cell C3 to see how the
amount to be reserved in Cell C8 changes.
iple Segments
Example 16-3 Dynamic Pricing

Quantity at beginning of season = 400

Period Price Demand Revenue
1 $ 162.20 137.80 $ 22,351.28
2 $ 127.58 134.15 $ 17,114.36
3 $ 95.53 128.05 $ 12,232.30
Total 400.00 $ 51,697.94
Example 16-3 (Dynamic Pricing)
Demand curve for period 1: d1 = 300 - p1
Demand curve for period 2: d2 = 300 - 1.3p2
Demand curve for period 3: d3 = 300 - 1.8p3

Goal is to find prices for each of the three periods that maximizes the
total revenue in Cell D8.

Use Solver to maximize Cell D8 by changing Cells B5:B7. Change initial

quantity in Cell B3 and repeat pricing and revenues.
Example 16-3 (Fixed Pricing)

Quantity at beginning of s 400

Period Price Demand Revenue
1 $ 121.95 178.05 $ 21,713.27
2 $ 121.95 141.46 $ 17,251.64
3 $ 121.95 80.49 $ 9,815.59
Total 400.00 $ 48,780.49

Example 16-3 (Fixed Pricing)

Demand curve for period 1: d1 = 300 - p1
Demand curve for period 2: d2 = 300 - 1.3p2
Demand curve for period 3: d3 = 300 - 1.8p3

Goal is to find a fixed price for the three periods that maximizes the
total revenue in Cell D8.

Use Solver to maximize Cell D8 by changing Cell B5. Cells B6 and B7

are set to be equal to Cell B5. Change initial quantity in Cell B3 and
repeat pricing and revenues.
Example 16-4 Evaluating Initial Quantity with Dynamic Pricing
Cost per unit = $ 100.00
Quantity at beginning of season = 245
Period Price Demand Revenue
1 $ 200.00 100 $ 20,000.00
2 $ 165.38 85 $ 14,057.70
3 $ 133.33 60 $ 8,000.01
Total 245 $ 42,057.71
Profit = $ 17,557.69

Example 16-4 (Evaluating quantity with dynamic pricing))

Demand curve for period 1: d1 = 300 - p1
Demand curve for period 2: d2 = 300 - 1.3p2
Demand curve for period 3: d3 = 300 - 1.8p3

Goal is to find an initial order quantity that maximizes season profits in Cell D9
given a unit cost in Cell B2.

Use Solver to maximize the profit in Cell D9 by changing Cells B3 (initial quantity)
and Cells B5:B7 (dynamic prices).
Example 16.4 (The challenge of strategic customers)
Cost per unit = $ 100.00
Quantity at beginning of season = 245
Price Demand Revenue
without without without
strategic strategic strategic
Period customers customers customers
1 $ 200.00 100 $ 20,000.00
2 $ 165.38 85 $ 14,057.30
3 $ 133.33 60 $ 7,999.80
Total $ 42,057.10
Profit = $ 17,557.08

Example 16-4 with strategic customers

We assume that the retailer starts the season with 245 units as in Example16-4. When customers are not
strategic and do not delay their demand, the monthly pricing is in cells B5:B7, monthly demand in cells
C5:C7. Total revenue in the absence of strategic customers is given in Cell D8.

Given that customers are strategic, some of the customers who would have bought in months 1 or 2
delay their purchase to month 3. The sales in months 1 and 2 with strategic customers are entered in
Cells F5 and F6. All left over inventory (245 - F5-F6) must be sold in month 3. The retailer thus
prices in month 3 (Cell B7) to sell all available quantity given the demand curve d3 = 300 - 1.8p3. In other
words, p3 (in Cell E7) = (300 - Leftover quantity)/1.8.

Total profit with strategic customers is shown in Cell G8. Change the amount sold in Cells F5 and F6 to
see how the profit in Cell G9 (with strategic customers) changes.
 Demand
Price with with Revenue with
strategic strategic strategic
customers customers customers
$ 200.00 80 $ 16,000.00
$ 165.38 50 $ 8,269.00
$ 102.78 115 $ 11,819.45
245 $ 36,088.45
Profit = $ 11,588.43

hen customers are not

hly demand in cells

in months 1 or 2
ers are entered in
tailer thus
300 - 1.8p3. In other

Cells F5 and F6 to
Example 16-4 (Fixed Pricing with strategic customers)
Unit cost = $ 100
Quantity at beginning of s 245
Period Price Demand Revenue
1 $ 159.76 140.24 $ 22,404.82
2 $ 159.76 92.32 $ 14,748.22
3 $ 159.76 12.44 $ 1,987.21
Total 245.00 $ 39,140.24
Profit $ 14,640.24
Example 16-4 (Fixed Pricing with strategic customers)
Demand curve for period 1: d1 = 300 - p1
Demand curve for period 2: d2 = 300 - 1.3p2
Demand curve for period 3: d3 = 300 - 1.8p3

Goal is to find a fixed price for the three periods that maximizes the
total profit in Cell D9.

Use Solver to maximize Cell D9 by changing Cell B3 & B5. Cells B6 and B7
are set to be equal to Cell B5.
Example 16-5 Overbooking
Capacity available at apparel supplier 5,000
Cost per unit of wasted capacity, Cw $ 10.00
Cost per unit of capacity shortage, Cs $ 5.00

Probability that cancellations will be less than or equal to the

optimal booking level, s* 0.667

Cancellation distribution is fixed

Demand cancellation mean 800
Std deviation of demand cancellation 400
Optimal overbooking level, O* 972
Optimal order level 5,972

Cancellation distribution is order size dependent

Average cancellation rate 15%
Coefficient of variation of cancellations 0.5
O evaluated using Equation 16.8 1,115
Overbooking level, O* 1,115
Optimal order level 6,115
Cell B11 contains the optimal overbooking level
(obtained using Equation 16.7) assuming a fixed
cancellation distribution with mean
in Cell B9 and standard deviation in Cell B10.

To obtain the optimal overbooking level, change

Cell B18 until it equals the number in Cell B17.
When the two are equal, Cell B18 contains the
optimal overbooking level (solution to
Equation 16.8).
Example 16-6 Long-term Bulk Contracts versus the Spot Market

Mean transportation needs 10,000,000

Std dev 4,000,000
Bulk contract cost, cB $ 10,000
Spot market cost, cS $ 12,500
Optimal probability p* (Equation 16.9) 0.2
Optimal order amount Q* (Equation 16.10) 6,633,515