Capacity commitment and pricing for substitutable products under competition

Capacity acquisition and pricing decisions are a company’s long-term strategic decisions. However, demand uncertainty and substitutability of multiple products cause the difficulty to solve capacity and pricing decision problems. In this paper, we address a multiple product pricing and multiple resource capacity acquisition problem with demand uncertainties and competition. The company needs to determine capacity commitment for each resource and product prices before demands are realized so that the total profit is maximized. If the demand exceeds the committed capacity, extra amounts can be purchased from the spot market. Variable unit production costs, capacity acquisition and maintenance costs are considered. We first analyze a single company basic problem and find the optimal solutions on prices and capacity. Based on the single company model, we address the two-product, two-firm capacity commitment and pricing problem considering across product and across company price competition factors. The existence and uniqueness of equilibrium on price and capacity commitment are proved, and then we extended the results to the multiple product, multiple company case.