Mitigating Supply Risk with Limited Information : Emergency Supply and Responsive Pricing

This paper investigates the implications and interplay of emergency supply and responsive pricing—two effective strategies to mitigate supply risk—in response to yield randomness with limited distributional information. Specifically, we adopt a distribution-free approach to study an ambiguity-averse monopoly’s joint pricing and production decisions under four distinct models resulting from possible combinations of the two strategies. We derive for all four models, closed-form solutions of the optimal price and production decisions as well as the optimal profit. Through comparative analysis, we obtain several managerial insights based on the problem’s parameters, including cost parameters, demand parameters, and supply variation. In particular, we show that there exists a threshold such that the firm can benefit more from pure emergency supply than from pure responsive pricing if the unit emergency purchasing cost is not larger than this threshold, and we find out that emergency supply and responsive pricing may be strategically substitutes