Journal of Industrial Engineering Research in Production Systems

Journal of Industrial Engineering Research in Production Systems

Modeling and Analysis of Pricing and Innovation Strategies in Product Development with Heterogeneous Customers and Dual Policies

Document Type : Research Paper

Authors
Shayan Sotouneh 1
Mohsen Sheikh Sajadieh 2
Matineh Ziari 3
1 MSc Student, Department of Department of System Engineering, Faculity of of Industrial Engineering and Management Systems, Amirkabir University of Technology (Tehran Polytechnic), Tehran, Iran
2 Associate Professor, Department of System Engineering, Faculity of of Industrial Engineering and Management Systems, Amirkabir University of Technology (Tehran Polytechnic), Tehran, Iran
3 Assistant Professor, Department of Industrial Engineering & Management Systems, Faculity of Industrial Engineering, University of Tehran, Tehran, Iran
10.22084/ier.2025.30980.2205
Abstract
Pricing is a critical element in supply chain decisions across strategic, tactical, and operational levels. Rapid technological innovation accelerates product introductions while empowering consumers to anticipate prices and performance. This paper develops a two-period mathematical model for optimizing pricing and product innovation decisions in markets with heterogeneous customers (myopic and strategic). Key contributions include: (1) determining optimal new product innovation level considering R&D costs, (2) introducing a comprehensive, behaviorally-informed customer utility function, and (3) jointly analyzing the impact of both customer types. Modeled within a dynamic game framework, the solution determines optimal first- and second-period prices, trade-in discounts, reduced prices for old products, and new product innovation levels. To solve this nonlinear problem, we develop a customized algorithm based on the spatial branch and bound method. Sensitivity analyses reveal that innovation level, strategic customer behavior, and pricing policy significantly impact profitability. Key findings indicate: (1) pre-determined pricing generates higher profits in 70% of scenarios, (2) dynamic pricing becomes superior under high product development costs or high proportions of strategic customers, and (3) trade-in program effectiveness increases with higher recycled product value. The analysis quantifies the distinct impacts of strategic customers, myopic customers, and trade-in programs. These insights provide managers with actionable guidance for selecting pricing strategies based on specific customer compositions and market conditions.
Keywords
Pricing Strategy
Heterogeneous Customers
Incremental Innovation
Trade-In Program
Subjects
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Journal of Industrial Engineering Research in Production Systems
Volume 13, Issue 26
September 2025
Pages 95-117