Dynamic and adaptive price quotation in a Make-To-Order company

Abstract

This paper studies a problem in which a Make-To-Order (MTO) firm makes price quotation to each customer on its arrival. The price is decided based on the firm's knowledge of its target market, i.e., the distributions of customer's willingness to pay, impatience factor, etc. We propose a dynamic pricing strategy to find the optimal price as well as an approximation method for large scale problems. We also propose a learning method to adaptively revise the firm's estimation of the distributions of customer's willingness to pay and impatience factor according to the customers' purchase behavior. We consider two possible cases. First, we study the case where the firm only provides due-date-guaranteed service. Second, we study the case where the firm offers due-date-guaranteed-optional service, in which the customer can choose either due-date guaranteed orders or due-date unguaranteed orders.