An Extended Mixed Integer Programming Model for Optima Pricng and Capacity Allocation

This paper studies a firm’s profitability problem offering its products into different market segments at differentiated prices. In order to improve the firms’ profitability the firm needs to decide the prices and order quantities allocations for each market segment. In a perfect market segmentation, it is assumed that the customers do not cannibalize between market segments. However, it is not uncommon to observe an imperfect market segmentation, in which the customers cannibalize from a high price market segment to a lower price segment and vice versa. Models to determine the optimal strategies for pricing and order quantity for a firm experiencing customers’ cannibalization and facing both the deterministic and stochastic price dependent demand. Numerical examples are presented to demonstrate the effect of cannibalization using the proposed models.