Production, inventory, and pricing under cost and demand learning effects

The paper considers a monopolist firm that plans its production, inventory, and pricing policy over a fixed and finite horizon. The problem is represented by an optimal control model which combines elements from three streams of literature. The first of these is a classical OR area and deals with optimal production and inventory under exogenously given demand conditions. The second is an area of marketing science which studies dynamic pricing under demand learning effects. Demand learning refers to the situation where current demand for a product is influenced by past demand. The third area belongs to microeconomics and industrial organization and is concerned with the effects of learning-by-doing in a firm's production process. Learning is reflected in a unit production cost that decreases with cumulative production. Using a path-synthesizing procedure we obtain closed-form characterizations of optimal production, pricing, and inventory policies.