Optimal production, purchasing and pricing: A differential game approach (Q1068700)

This paper deals with a problem of determining optimal production and pricing policies of a manufacturing firm which is supplying a retailer. The latter faces a price-dependent demand function towards the final consumers and wishes to determine optimal purchasing and pricing policies. Both firms carry inventories and backlogging is permitted. The problem is modelled as a two-player nonzero-sum differential game with the inventory levels as the state variables. The controls are the rates of production and purchasing as well as the prices. Assuming linear production costs, but convex ordering and holding costs, open-loop Nash controls are characterized by using switching point analysis as well as phase diagrams.