Dynamic Pricing and the Direct-to-Customer Model in the Automotive Industry

The Internet is changing the automotive industry as the traditional manufacturer and dealer structure faces increased threats from third party e-tailers. Dynamic pricing together with the Direct-to-Customer business model can be used by manufacturers to respond to these challenges. Indeed, by coordinating production and inventory decisions with dynamic pricing, the automotive industry can increase profits and improve supply chain performance. To illustrate these benefits, we discuss a strategy that incorporates pricing, production scheduling, and inventory control under production capacity limits in a multi-period horizon. We show that under concave revenue curves, a greedy algorithm provides the optimal solution, and we describe extensions to the model such as multiple products sharing production capacity. Using computational analysis, we quantify the profit potential and sales variability due to dynamic pricing, and we suggest that it is possible to achieve significant benefit with few price changes.Research supported in part by ONR Contracts N00014-90-J-1649 and N00014-95-1-0232, NSF Contracts DDM-9322828, DMI-9732795 and DMI-0085683, a research grant from the Natural Sciences and Research Council of Canada (NSERC) a grant from General Motors, and a grant from the eBusiness Center at MIT.