Coordinating pricing and production decisions in the presence of price competition
In this paper we study the effects of coordinating pricing and production decisions on the improvement of a firms position in a price-competitive environment. Assuming duopolistic market conditions, we use game-theoretic concepts and models to analyze two scenarios. A firms marketing and production departments may vertically coordinate their pricing and production quantity decisions and the two firms may horizontally compete for price-sensitive random demand. The two scenarios include (i) no coordination and (ii) coordination in both firms. We show that by coordinating their pricing and production decisions, competing firms can increase their profitabilityespecially when conditions are unfavourable (i.e., with smaller market sizes, higher unit costs and lower unit revenues). While it may be intuitive to expect that coordination will outperform non-coordination, our models provide a means for formalizing and quantifying the differences between the two policies.
production marketing game theory inventory