TY - JOUR
T1 - Two Backorder Compensation Mechanisms in Inventory Systems with Impatient Customers
AU - Chen, Jian
AU - Huang, Shuo
AU - Hassin, Refael
AU - Zhang, Nan
N1 - Publisher Copyright:
© 2015 Production and Operations Management Society.
PY - 2015/10
Y1 - 2015/10
N2 - We study a compensation mechanism design problem with customer-choice behavior in a continuous review setting where the production and demand processes are stochastic. When a stockout occurs, the firm controls backorders on the basis of certain compensation policies. Customers make decisions to maximize their utility, which is decreasing in the price, the waiting time, and the customer's impatience factor. We assume that the impatience factor is private information held by the customer only. Two compensation mechanisms are designed to control backorders, namely uniform compensation and priority auction with an admission price. Under uniform compensation, the firm offers the same discount to all customers, whereas under auction compensation, priority is granted according to the customers' bid prices. We obtain the optimal stockout price and base stock level under each mechanism, and analyze the properties of the respective optimal policies. Assuming linear waiting costs with uniformly distributed impatience factor, we find that the auction mechanism (1) maintains a lower base stock level and results in greater profit and (2) benefits customers with relatively lower or higher impatience factors, but customers with a medium impatience factor may be rendered worse off. We further show that both compensation mechanisms are suitable for products with a high unit profit, a high lost sales penalty cost, and a high holding cost.
AB - We study a compensation mechanism design problem with customer-choice behavior in a continuous review setting where the production and demand processes are stochastic. When a stockout occurs, the firm controls backorders on the basis of certain compensation policies. Customers make decisions to maximize their utility, which is decreasing in the price, the waiting time, and the customer's impatience factor. We assume that the impatience factor is private information held by the customer only. Two compensation mechanisms are designed to control backorders, namely uniform compensation and priority auction with an admission price. Under uniform compensation, the firm offers the same discount to all customers, whereas under auction compensation, priority is granted according to the customers' bid prices. We obtain the optimal stockout price and base stock level under each mechanism, and analyze the properties of the respective optimal policies. Assuming linear waiting costs with uniformly distributed impatience factor, we find that the auction mechanism (1) maintains a lower base stock level and results in greater profit and (2) benefits customers with relatively lower or higher impatience factors, but customers with a medium impatience factor may be rendered worse off. We further show that both compensation mechanisms are suitable for products with a high unit profit, a high lost sales penalty cost, and a high holding cost.
KW - Nash equilibrium
KW - auction
KW - compensation mechanism
KW - make-to-stock
KW - pricing
KW - queuing
KW - strategic customers
UR - http://www.scopus.com/inward/record.url?scp=84943361858&partnerID=8YFLogxK
U2 - 10.1111/poms.12360
DO - 10.1111/poms.12360
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AN - SCOPUS:84943361858
SN - 1059-1478
VL - 24
SP - 1640
EP - 1656
JO - Production and Operations Management
JF - Production and Operations Management
IS - 10
ER -