Pricing strategy and reserved capacity plan based on product

life cycle and production function on LCD TV manufacturer

Z.H. Che
*
Department of Industrial Engineering and Management, National Taipei University of Technology, 1, Sec. 3,
Chung-Hsiao E. Road, Taipei 106, Taiwan, ROC
Abstract
Since 2003, electronic products have become the main power of national economy growth. All the manufacturers have set their pri-
mary markets to meet the consumers demand. Taking the current LCD TV manufacturers as an example, they have to emphasize on the
product design, performance and the reduction of cost. Therefore, nowadays the most important task for LCD TV industry is that the
international manufacturer shall x a suitable winwin price and productive capacity for itself as well as for the Original Equipment
Manufacturing (OEM) when the OEM has received the order, so that both sides could construct a long-established relation and they
could reach the object of maximized prot. This research develops an initiative winwin pricing strategy based on product life cycle
(PLC), and for the OEM, this research has used the production function (PF) to deal with the pricing and the maximum ow potential
under dierent PF. It wants to found a decision model based on genetic algorithm and use Visual Basic to construct an information
system so that the industry circle could have a judging standard for reserving productive capacity and pricing strategy. While the suc-
cessful pricing is not only a nal result, it is a continual process; we hope this user interface could help the enterprises to study out a
suitable price and productive capacity structure.
2008 Elsevier Ltd. All rights reserved.
Keywords: Initiative winwin pricing; Product life cycle; Production function; Genetic algorithm
1. Introduction
With the fast development of technology, dierent kinds
of digital products appear. Every year about 170 million
televisions are demanded in the world market, and the
LCD TV is the one that enjoys the fastest growth speed.
Every manufacturer has its primary market to meet the
consumers demand. Nowadays LCD TV rms have to
pay attention to the product design as well as the market
competition price, the obvious lever eect of price (Dolan
& Simon, 1996) has once indicated that if the price has
increased by 1%, the net prot of Coca Cola would increase
by 6.4%, and the net prot of Fuji Film would increase by
16.7%; Nestle would increase by 17.5%; FMC would
increase by 26%; Philips would increase by 28.7%. For
some enterprises, the price may even be the factor that
brings prots or losses to the company. Price represents
the identication of seller and purchaser for product value,
so international manufacturers should x a suitable win
win price and productive capacity for itself as well as for
the OEM when the OEM has received the order, so that
both sides could construct a long-established relation and
reach the object of maximized prot. Suo, Chu, and Jin
(2004) also proposed to change the focus from the market
share to maximization of industrial prot; this is the most
important problem for us nowadays.
This study is based on PLC, what also Levitt (1965) pro-
posed to develop the initiative winwin pricing strategy for
the manufacturer, and Kotler and Philip (1991) mentioned
that we should rst collect the PF before deciding the price,
Assel and Henry (1990) added the PF and applied PF con-
cept into the cost of manufacturer and OEM (Nick, 2004).
0957-4174/$ - see front matter 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.eswa.2007.12.063
*
Tel.: +886 2 2771 2171x2346; fax: +886 2 7317168.
E-mail address: zhche@ntut.edu.tw
www.elsevier.com/locate/eswa
Available online at www.sciencedirect.com
Expert Systems with Applications 36 (2009) 20482061
Expert Systems
with Applications
Then we would focus on the market share of the output
(Ju ttner, Godsell, & Christopher, 2006), and the relative
price dierence ratio of the former products is also a key
factor to aect the market share, price has replaced the
one-sided elastic eect of tradition research as one of the
key variables, it has considered the dierent PLC stages
(introducing stage, growth stage, mature stage and decline
stage) of the products of the manufacturer and OEM under
dierent PFs.
And some study such as the essay of Safaei, Sadjadi, and
Babakhani (2006) suggested using genetic algorithm to get
the selling price when the products are sold in two or more
markets. When we use genetic algorithm, only tness value
is necessary, we do not need the derivative of the function
or some other complex operations or information. Whats
more, genetic algorithm is more exible and it does not
need the whole information of problem structure and all
the parameters which are necessary for the traditional opti-
mization method (Beddoe & Petrovic, 2006). And Midgley,
Marks, and Cooper (1997) suggested that in unsymmetrical
competitive market and the oligopoly market we could use
genetic algorithm to predict the optimal quantity and use
the pricing of brand product to reach the optimal prot,
and we also could use competitive policy to calculate mar-
ket structure and use genetic algorithm to predict the pric-
ing of the product under this pricing structure. In our
research the PLC and PF are considered. Hence, the math-
ematic model for initiative winwin price strategy in this
study is more complex and has characteristics of time-con-
suming to solve. Accordingly, we also mainly use genetic
algorithms to assist problem solving.
This research hoped to build a model based on genetic
algorithm, and it used Visual Basic to construct the infor-
mation system, so that companies could consider both its
self-prot and the long-established relations with the
appurtenant manufacturers to reach the maximized prot.
Because the price competition is the fatal killer for enter-
prise prot, they should try their best to avoid the
would-be price war.
2. Product life cycle and production function
The emphasis of this research started from PLC, it dis-
cussed how could the enterprise to program the product
pricing and multiple restrictions after considering the inu-
ence of external condition changes and interior business
resources. The PLC concept has been raised for a long
time, it is mainly a personied concept, which supposes
that the product has its introducing stage, growth stage,
mature stage and decline stage which is the same as the
birth, growing, mature and aging of human beings. The
scholars also proposed other viewpoints based on this
spirit, Sakai, Tanaka, and Shimomura (2003) Chen, Liao,
and Weng (2006) mentioned that PLC could play two roles
when it acts as the planning tool, it could describe the pos-
sible product policies in dierent stages of PLC, when it
acts as a control tool, it helps the enterprise to compare
its product with the former similar product to estimate
the performance of the products that would be introduced
to the market, and the PLC curve could also help us to
study and decide the future product policy after analyzing
the history product sale data.
Fig. 1. Features of each PLCs stage (Kotler & Philip, 1991).
Z.H. Che / Expert Systems with Applications 36 (2009) 20482061 2049
Cox (1967), Easingwood (1988) and Juergen (2006) pro-
posed that PLC viewpoint could make PLC as a sort of
programming tool. It could clearly dene the characteris-
tics of each stage product and policies shown in Fig. 1, it
could help the enterprise to reach the proper execution
objects such as production control, job management, pro-
cess management and marketing management. Lamb,
Hair, and McDaniel (1998) had mentioned the character
of each stage of PLC as well as the pricing strategy, and
he also mentioned that if we could rst pay attention to
PLC, it would be easy for us to estimate the eciency of
this product planning by evaluating the actual cost and
the predicted cost (Clinton & Graves, 1999). We could eas-
ily obtain how the environment inuences the product
development, mass production and distribution from
PLC (Brady, Henson, & Fava, 1999). More and more stud-
ies stress that the quick development of present science and
technology shortens the PLC, and it also makes the PLC
cost analysis become more important for the organization
(Murthy & Blischke, 2000). Dunk (2004) specially pointed
out that the primary inuential factors for PLC cost anal-
ysis are the consumers characteristics, competitive advan-
tage and information quality of IS (information system), all
of them play the important roles in the organization, so this
research studied on the PLC, that is the changes in quantity
and time, it involved the possibility of dynamic changes
caused by the change of time and provided the enterprise
with a relatively perfect program in the pricing decision
process.
PF means that using mathematical relationship to repre-
sent the technology relation between the input amount of
production factors and output (Josephson, 2006). Through
the estimation and analysis based on PF, we could observe
the economic conditions of production scale, quotient
changes of production factor as well as substituting possi-
bility among the production factors (Felipe & Adams,
2005). We could also use the estimated PF to predict the
amount of input labor or capital under certain product
demand level to improve the revision of the economic plan-
ning (Winston & Benjamin, 2006).
Among all the production factors used by manufactur-
ers and OEM, the quantity of some factors is easy to be
changed, while others cannot be changed. The rst is rep-
resented by labor (L for short); and the latter is represented
by capital (K for short) including the factory buildings,
machines and so on. The production relations between fac-
tors and quantity (Q for short) can be expressed as
Q = f(L, K), which means that L and K are two variables,
after giving them certain number, Q is xed.
We could use a function to represent the entity relation
between input production factors and output:
Q = f(a, b, c, . . .), a, b, c represent dierent kinds of produc-
tion factors, Q represents product quantity. The function
means that when f represents production technology, if
we input certain amount of production factors a, b, c, we
could get Q output. For example: Q represents panel out-
put, a is working personnel, b is machinery and equipment,
c is raw material and dierent kinds of factors, the function
represents that we could get Q panel output if we input cer-
tain amount of production factors as manpower, equip-
ment, and raw material under present production
technology. When we analyze the production process, we
usually divide production period into the following four
conditions:
(1) Very short run: All the factors of production are
within the xed period.
(2) Short run: The period in which we cannot change all
the factors of production. (some of them can be chan-
ged, some are xed).
(3) Long run: The period in which we could change all
the production factors.
(4) Very long run: The period in which we even could
change the technology.
For the very short run, all the factors remain the same,
so each stage output is xed, we do not have to use PF to
predict and analyze future output. And we cannot get the
exact changing range of technology in very long run, so
the function prediction is not reliable. Therefore, PF is usu-
ally used to analyze the production periods of short run
and long run.
Scholars Arrow, Chenery, Minhas, and Solow (1961)
have published xed elasticity of substitution PF based
on the labor added value of 24 manufacturers in 19 coun-
tries (between the per unit labor added value and real wage
rate), they all show the following functional relationship:
log y log a b log w e:
y represents the labor added value; w represents the real
wage rate; a,b represents parameter; e represents random
error item. Then we could derive the following CES PF:
Q AaK
q
1 aL
q

1
q
:
A is technical parameter; q is substitution parameter; a is
distribution parameter; Q is nal output; K is capital input;
L is labor input. We could get the elasticity of substitution
from the above formula: r
1
1q
* MRTS
a
1 a
K
L
_ _
1q
;
ln MRTS
ln
a
1 a
ln
K
L
_ _
1q
ln
a
1 a
1 q ln
K
L
_ _
;
) r
dln
K
L
dln MRTS

1
1 q
:
And then we derive the following PF from CES PF:
(1) Cobb-doglus PF (C-D PF):
When q ?0, then r ?0, the CES function could
split up as C-D PF, its form isQ = AL
a
K
b
(A is a con-
stant), A represents the group with high technical
2050 Z.H. Che / Expert Systems with Applications 36 (2009) 20482061
parameter which could produce higher output, a and
b are the parameters corresponding to N and K,
higher a represents the larger contribution of L to
quantity for the same amount of input, similarly,
higher b represents the larger contribution of K to
quantity for the same amount of input, the MRTS
of C-D PF is xed by using proportion of two factors
which is shown in Fig. 2, the point A, B, C represent
dierent quantities, but the using proportion of the
factors are xed as K. Besides, the C-D PF has the
following characters:
(1) When a + b > 1, we would get increasing returns
to scale.
(2) When a + b < 1, we would get decreasing returns
to scale.
(3) When a + b = 1, we would get xed returns to
scale.
(2) Leontief PF (constant rate PF):
Whenq ?1, then r ?0, CES function could split
up as completed complementary PF, its form is (a, b
are both constants), its primary characteristics are
shown in Fig. 3:
(1) When we use a unit N and b unit K, we could get
a unit of quantity (Q = 1).
(2) The corresponding input combination of break
point E is (N
*
,K
*
) = (aQ = bQ).
(3) The equation corresponding to
~
OE is N/a = K/
b ?K = (b/a) N.
(4) The quantity increasing in the northeast
direction.
Arrow et al. indicated that CES function could contain
the production types of general manufacturing industry
(Narisa, Tang, & Luo, 2006), so this research has decided
the optimal factor by using the quantity, respectively of
the PF of these two types, and then we make out the price
for both sides and the optimal quantity.
3. Winwin cooperation
In the later 1970s, the most popular strategy values the
prot and stresses the importance of market share. Buzzell
and Gale (1975) suggested that we could only get the hen
that lays gold eggs if we could own high market share in
low-growth industry. The establishment of market share
is the way to get long-term prot; we should even sacrice
the short prot if necessary and enjoy the harvest when the
market is mature.
However, the recent business environment has changed
this thought which stresses on the importance of market
share. The desperate pursue of market share may lead to
quantity surplus, price-cutting competition, and even make
us lose everything we own. Price would not only impact the
market share, it would also inuence the market scale and
the value of market share. McKinsey and Company raised
the Marketers metamorphosis (Harris, 1997) to explain
this condition, it indicated that the market participants of
1990s should make fundamental transformations in
multi-aspect, one of them is to change the original object
of pursue market share to search for market surplus. The
focus should be changed from market share to the wide
level of shifting industry and cooperation in order to create
larger prots, this is also what Schilli and Dai (2006) have
presented, they suggested that the cooperation scope of
supplier and OEM should contain the whole life cycle of
the product which is shown in Fig. 4.
Suo et al. (2004) also proposed that if the market
demand is xed, the manufacturer and supplier may get
into a zero-sum game, however, the consumers demand
under the continual and fast changing modern science
and technology environment is hard to grasp. In order to
create a winwin relation, the indeterminate market
demand has made the mutual cooperation become neces-
sary. Kumar, Markeset, and Kumer (2004) proposed that
the lack of correct negotiation among the enterprises may
lead to the conicts and the losses of both sides, the crucial
negotiation contents contain the product characteristics,
price and basic facilities. Only by the correct negotiation,
could we build the long-term reciprocity to create the
winwin relation which is shown in Fig. 5. Generally
speaking, price competition is the fatal killer of the enter-
prises prot; therefore, we should try our best to avoid
price war and try to reduce the intensity of the price com-
petition within the trade to form the trade privity (Christia-
anse & Markus, 2002).
K
L
0
Q
1
Q
2
Q
3
K/L=k
A
B
C
Fig. 2. Cobb-douglas PF.
K= Q
N= Q N
K
Q
0
E
K=( / )N
Fig. 3. Leontief PF.
Z.H. Che / Expert Systems with Applications 36 (2009) 20482061 2051
4. Problem description
Due to the changes of digital signal transmission mode,
a display technique revolution has begun in TV market,
among the LCD TV having the advantages of slight, elec-
tricity-saving, radiation free and so on, and therefore, it has
attracted the attention of nearly 30 Taiwan manufacturers.
LCD TV products are very popular nowadays, IT industry,
the distributors of dierent areas and so on have tried hard
to gain the upper hand in this market. Although the rst
three companies all belong to the global Marketing compa-
nies such as Sharp, Sony and Samsung, they all possess the
market share to a certain degree. How to face the following
competitors, how to keep certain amount of prot among
dierent aspects as the supplier, OEM and so on have
become the important subjects for these companies.
This research discussed how could the international
manufacturers nd out a balanced and winwin policy with
the OEM on the price and quantity of the order. Based on
this, this research has considered the PLC of manufacturer,
the initiative winwin pricing model of manufacturer as
well as the pricing model of OEM so that they could reach
the objects of the long-established relation and maximized
prot.
Large deal of wastes of OEM productive capacity
booked by the manufacturer are caused by the mistakes
of prediction, such as raw material, labor cost and manu-
facturing cost. This research would construct the demand
function with the past elasticity of production to predict
the market demand of LCD TV, and it would dene the
characteristics of each stage, respectively combining the
PLC of all the LCD TV made by the manufacturer, and
Product
engineering
Assembly
Shipment and
Installation
Services
to
Customer
OEM
Requirements
Eniginering
Component /Sub-
System
Engineering
Assembly
Information Backbone
OEM Process
Supplier Process
Shipment and
Installation
Services
to
Customer
Customer
Requirements
Engineering
Fig. 4. The winwin for supplier and OEM cooperation based on information (Schilli & Dai, 2006).
Service delivery
negotiation process
Undersirable inputs
- Unclear/mismatched
information and/or
specifications
Undersirable
- Agreements failure
- Conflicts
Desirable output
-Agreement of service
delivery
-Long term relationship
and win-win stituation
Desirable inputs
-Requirments (customer/
manufacturer/stakeholders)
-Product charateristics
-Type of service
-Negotiation influencing
-Price
Fig. 5. Negotiation structure of winwin cooperation (Kumar et al., 2004).
2052 Z.H. Che / Expert Systems with Applications 36 (2009) 20482061
then it could construct a initiative winwin pricing model
for the manufacturer based on the each stage characteris-
tics. For the cost of both sides, it could evaluate the mutual
considering parameters based on the PF of economic the-
ory, and nally, it could make out the optimal productive
capacity and pricing for manufacturer and OEM through
above steps. It would combine this model by genetic algo-
rithm to develop an interface for the user by Visual Basic
procedure language so that it could be used by the manu-
facturers to make decisions.
The problem of this research is constructed under the
following conditions:
(1) The multi-generation products based on PLC.
(2) One-for-one (one manufacturer and one OEM) initia-
tive winwin pricing model.
(3) The form of cost function shall conform to the
restrictions of Cobb-douglas and Leontief.
5. Cost model, demand elasticity, and production demand
function development
The representation of manufacturer and OEM costs is
mainly derived from the Cobb-douglas and Leontief of
PF, the following part is the concise deduction program:
(1) The short-term cost function of Cobb-douglas:
Supposing that the input amount is fastened to K in a
short run, then the optimal planning of the manufac-
turer is
Min w N r K
s:t: Q A N
a
K
b
;
the solution for the above planning problems, after
transposition of restriction formula we could get the
short run optimal utilization of labor decision for
the manufacturer is N
s

Q
A
_ _1
a
K
_ _

b
a
.
If we substitute the above result into the objective
function, we could receive the short-term cost func-
tion is STC wN
s
rK w
Q
A
_ _1
a
K
_ _

b
a
rK.
For above results, and rK is the xed cost which
would not change with the changes of output,
wL
s
w
Q
A
_ _1
a
K
_ _

b
a
.
(2) The short-term cost function of Leontief:
Supposing that the quantity of input K is fastened to
K in short run, then we could get the solution for
optimal planning problem for the manufacturer is
Min wN rK
s:t: Q Min
N
a
;
K
b
_ _
;
K > bQ:
It is directly derived from the restriction formula:
N
s
= aQ, is shown in Fig. 6.
Substituting N
s
= aQ to the objective function, we could
get the short-term cost function:
SCQ; K;w; r aWQ rK;
VC aWQ; FC rK;
so SVC (short-term average variation cost)
VC
Q
aW,
SMC (short-term average marginal cost)
dSC
dQ
aW, SAC
(short-termaverage cost)
SC
Q
aW
rK
Q
, is shown in Fig. 7.
Q
D
represents the demand of a certain product, and P
represents the product price, then we dene the price elas-
ticity of demand (demand elasticity for short) of this
product as E
D

DQ
D
Q
D
DP
P

DQ
D
DP

P
Q
D
, DP and DQ
D
repre-
sent the changes of price and demand, respectively, the
above denition expresses that when the price has chan-
ged for 1%, the percentage of change is in demand, that
is the sensitivity of the consumer for the price change of
certain product. If the demand elasticity of product x is lar-
ger than product y, this means that the consumers are more
sensitive to the price of product x than product y, when the
price changed in a very little range, the above denition can
be shown by partial dierential as
E
D

oQ
D
oP

P
Q
D
N
K
Q
0
E
N
s
=
K
Fig. 6. The short-term cost function of Leontief.
Q
SAC
0
SMC
SAVC
W
SAVC=SMC
SAC
Fig. 7. Leontiefs SAC, SMC, SAVC.
Z.H. Che / Expert Systems with Applications 36 (2009) 20482061 2053
and the arc elasticity parameters of demand can be ex-
pressed as
E
Q
2
Q
1
Q
2
Q
1
=2
P
2
P
1
P
2
P
1
=2

DQ
Q
2
Q
1
DP
P
2
P
1

P
2
P
1
Q
2
Q
1

DQ
DP
:
In a word, elasticity is peoples reaction to price changes,
and price elasticity of demand is used to measure the reac-
tion on product demand caused by price change. When the
price of certain product or labor service changes, then its
demand would also change, however, the change range of
dierent products or labor services would be dierent. If
the price change of other products may inuence the con-
sumers demand of this product, we would represent it with
cross elasticity is E
xy

dQ
x
=Q
x
dPy =p
y

dQ
x
dPy

Py
Q
x
, which is always
used to measure the inuence of price change of competi-
tors to the enterprise product, besides this the cross elastic-
ity among the product lines is also an essential factor for
product line pricing.
Dierent consumption groups have dierent price elas-
ticity of demand for the same product; and even for the
same product of dierent price ranges, its price elasticity
of demand may be also dierent; and the price elasticity
of demand of various kinds of products with the same price
may be dierent. The price elasticity of most products is
negative, which means that the fall of product price would
lead to the increase of product demand and then elevate the
sales volume. The larger changing range represents the
higher sensibility of the consumers toward the product
price, and the price elasticity demand is big. The price elas-
ticity of each product category raised Dolan and Simon
(1996) is shown in Table 1. It is observed from this table
that the consumers take price as the most important con-
sidering factor for the non-durable consumer goods with
small product dierentiation and high substitutability, so
the price elasticity of non-durable consumer goods is very
large, and they may get into price competition, and this
has highlighted the importance of this research, it has car-
ried out the price elasticity hypotheses based on this result.
The demand curve has dierent shapes and expresses
dierent meanings because of the dierent market struc-
tures and dierent product natures. We would usually
select the suitable demand function style by observing the
data scatter diagram of this product over the passing few
years, or we would set some forms out of some special pur-
poses. And the product demand predicted by linear type
could always meet the demonstration result; therefore, this
research would use the linear type product demand func-
tion to calculate the pricing model for generations. This
research has taken the maximal market prot as the rst
consideration, so it would calculate the total production
of i manufacturer in PLC stage s and the average product
selling price of the current market, the following formula-
tion has represented:
Q
t
a;si
Q
t1
a;si
Q
t1
a;si

Q
t
a;s
i

Q
t1
a;s
i

Q
t1
a;s
i

p
t
a;s
i

p
t
b;s
i

2
_ _

p
t1
a;s
i

p
t1
b;s
i

2
_ _ _ _
p
t1
a;s
i

p
t1
b;s
i

2
_ _
_

_
_

p
t
a;s
i

p
t
b;s
i

2
_ _

p
t1
a;s
i

p
t1
b;s
i

2
_ _ _ _
p
t1
a;s
i

p
t1
b;s
i

2
_ _ ;
where
Q
t
a;s
i

Q
t1
a;s
i

Q
t1
a;s
i

p
t
a;s
i

p
t
b;s
i

2
_ _

p
t1
a;s
i

p
t1
b;s
i

2
_ _ _ _
p
t1
a;s
i

p
t1
b;s
i

2
_ _
is the price elasticity and is expressed by e. This formula
means that the sensitivity of average price change of both
sides (manufacturer and OEM) to the total output; we
could get it after the rearrangement
Q
t
a;si
Q
t1
a;si
Q
t1
a;si
e

p
t
a;si
p
t
b;si
_ _
p
t1
a;si
p
t1
b;si
_ _ _ _
p
t1
a;s
i

p
t1
b;s
i

_ _
for all i 1; 2; 3; 4 t 1; 2:
6. Initiative winwin model development
The research bases on PLC, and its cost structure uses
Cobb-douglas and Leontief. The changed parameters
related to pricing include the market competition factors
corresponding to the change in the environment, the basic
ratio of price dierence between manufacturer and OEM,
the long-term policy cooperation factor that the manufac-
turer wants to build a long-established relation with the
OEM with the nal object of the maximal prot under this
long-established relations.
Expressions to construct the initiative winwin model
are explained in the following part?
t generation index, t = 0 or 1
s
i
stage iof PLC, i = 1, 2, 3, 4
a manufacturer
b OEM
p
t
a;s
i

product price of generation t at s

i
for manufacturer
Table 1
Price elasticity of estimating in real circumstances (Dolan & Simon, 1996)
Product category Literature Experience
Non-durable consumer goods 1.55 >2
Durable consumer goods 1.53 Uncertainly
Aviation >2 15
Railway transportation industry 1.5 <1
Telecommunication industry 0.71.7 0.31
After service of computer No 0.51.5
2054 Z.H. Che / Expert Systems with Applications 36 (2009) 20482061
p
t
b;s
i

product price of generation t at s

i
for OEM
Q
t
a;s
i

total reserved capacity of generation t at s

i
for
manufacturer
e elasticity of the average price against total reserved
capacity
TC
t
a;s
i

total reserved capacity cost of generation t at s

i
for
manufacturer
TC
t
b;s
i

total reserved capacity cost of generation t at s

i
for
OEM
M
t
a;s
i

the proportion of total reserved capacity of gener-

ation t at s
i
for manufacturer
j elasticity of pricing gap between manufacturer and
OEM rate against possession rate of manufacturer
q
t
a;s
i

reserved capacity of generation t at s

i
for manufac-
turer
q
t
b;s
i

reserved capacity of generation t at s

i
for OEM
a
t
a;s
i

corresponding parameter of labor power of gener-

ation t at s
i
for manufacturer
a
t
b;s
i

corresponding parameter of labor power of gener-

ation t at s
i
for OEM
b
t
a;s
i

corresponding parameter of capital of generation t

at s
i
for manufacturer
b
t
b;s
i

corresponding parameter of capital of generation t

at s
i
for OEM
w
t
a;s
i

unit labor cost of generation t at s

i
for manufac-
turer, namely salary rate
w
t
b;s
i

unit labor cost of generation t at s

i
for OEM,
namely salary rate
r
t
a;s
i

unit capital equipment cost of generation t at s

i
for
manufacturer
r
t
b;s
i

unit capital equipment cost of generation t at s

i
for
OEM
k
t
a;s
i

capital equipment invested of generation t at s

i
for
manufacturer
k
t
b;s
i

capital equipment invested of generation t at s

i
for
OEM
u market competition factor responding to market
changes
k factor of willingness for long-term cooperation of
the manufacturer and the OEM
g basic ratio of the pricing gap between the manu-
facturer and the OEM
The following part is the two dierent forms of cost
function, Cobb-douglas and Leontief, constructing the ini-
tiative winwin pricing model under the objective function
of whole market prot:
(1) Leontief initiative winwin model
Objective function:
Max p
t
a;si
q
t
a;si
_ _
p
t
b;si
q
t
b;si
_ _ _ _
TC
t
a;si
TC
t
b;si
_ _
for all i 1; 2; 3; 4
t 1; 2 1
s:t: p
t
a;si
p
t1
a;si
l for all i 1; 2; 3; 4; t 1; 2; 2
p
t
b;si
p
t1
b;si
g k for all i 1; 2; 3; 4; t 1; 2;
3
Q
t
a;si
Q
t1
a;si
Q
t1
a;si
e

p
t
a;si
p
t
b;si
_ _
p
t1
a;si
p
t1
b;si
_ _ _ _
p
t1
a;si
p
t1
b;si
_ _
for all i 1; 2; 3; 4; t 1; 2; 4
M
t
a;si
M
t1
a;si
j
p
t1
a;si
p
t1
b;si
p
t1
b;si
_ _ _

p
t
a;si
p
t
b;si
p
t
b;s
i

_ __
for all i 1; 2; 3; 4; t 1; 2; 5
q
t
a;si
Q
t
a;si
M
t
a;si
for all i 1; 2; 3; 4;
t 1; 2; 6
q
t
b;si
Q
t
a;si
q
t
a;si
for all i 1; 2; 3; 4;
t 1; 2; 7
TC
t
a;si
a
t
a;si
w
t
a;si
q
t
a;si
r
t
a;si
k
t
a;si
for all i 1; 2; 3; 4; t 1; 2; 8
TC
t
b;si
a
t
b;si
w
t
b;si
q
t
b;si
r
t
b;si
k
t
b;si
for all i 1; 2; 3; 4; t 1; 2: 9
(2) Cobb-douglas initiative winwin model:
Objective function: (1) s.t. (2)(7),
TC
t
a;si
w
t
a;si
q
t
a;si
A
_ _
1
a
t
a;s
i

k
t
a;si
_ _

b
t
a;s
i

a
t
a;s
i

r
t
a;si
k
t
a;si
for all i 1; 2; 3; 4; t 1; 2; 10
TC
t
b;si
w
t
b;si
q
t
b;si
A
_ _
1
a
t
b;s
i

k
t
b;si
_ _

b
t
b;s
i

a
t
b;s
i

r
t
b;si
k
t
b;si
for all i 1; 2; 3; 4; t 1; 2: 11
Eq. (1): the ultimate object of the manufacturer and OEM is
the maximization of market prot under long-established
relations, Eq. (2): rst of all the manufacturer pricing based
on the price of primary stage PLC of the dierent genera-
tions products as well as the external market competition
policy, Eq. (3): the OEM price would be gotten by multiply-
ing Eq. (2) by the dierence of price ratio of the manufac-
turer and the long-term policy cooperation factor, Eq. (4):
predicting the each stage market demand of dierent gener-
ation products PLC, in which we have considered the rela-
tion with the average price of previous generations, Eq.
(5): predicting the ratio of manufacture possessed in this
stage, and it has also considered to balance the price
between manufacturer and OEM, Eq. (6): multiplying total
production by Eq. (5) then we get the output during the PLC
Z.H. Che / Expert Systems with Applications 36 (2009) 20482061 2055
stage, Eq. (7): subtracting Eq. (6) from the total output dur-
ing the PLC stage we could get the output of the OEM; for
the cost, the supposed adopting forms between OEM and
manufacturer are Leontief of Eqs. (8) and (9) or Cobb-doug-
las of Eqs. (10) and (11).
7. Formulizing as a GA base solving model
The above reserving productive capacity and pricing
strategy problem shown in a single prot goal can be for-
malized as a GA based solving model. And the procedures
of the proposed solving model are described as follows:
Step 1: Encode
The changed parameters related to pricing of the
initiative winwin pricing model between manu-
facturer and OEM include the market competition
factor corresponding to the environment changes,
the basic ratio of price dierence between manu-
facturer and OEM, the long-term policy coopera-
tion factor that the manufacturer wants to build a
long-established relations with OEM, we treat
these three items as three pieces of genes and
adopt the real number encoding. Michalewicz
(1997) once presented that the genetic algorithm
with real GA had faster convergent speed and
was more consistent during execution. The rst
gene: the market competition factor correspond-
ing to the market changes, the manufacturer can-
not control the industry prosperity in the
environment, so the price should be raised or low-
ered at proper time, supposing that the range is
0.9851.015. The second gene: the basic ratio of
price dierence between manufacturer and OEM,
the price of manufacturer is certain lower than
that of the manufacturer, supposing that its range
is 0.960.99. The third gene: the manufacturer
raises the OEMs price adequately for the long-
term prot, supposing that its range is 11.02.
Therefore, a strip of chromosome would have
three pieces of genes, after encoding we would
carry out the next-stage calculation process; the
encoding of chromosome is shown in Fig. 8.
Step 2: Population number and initial population
This case would compare the system with 50 pop-
ulations and 800 generations with the system with
50 populations and 1000 generations. The initial
population would be generated stochastically,
and these stochastically generated data would con-
form to the restriction formula of this case. The
selected factors of each strip of chromosome
include the market competition factors corre-
sponding to the change in the environment, the
basic ratio of price dierence between manufac-
turer and OEM, the long-term policy cooperation
factor that the manufacturer wants to build a
long-established relation with the OEM with the
object of the maximal prot under long-estab-
lished relations, all these would be substituted in
the object formula.
Step 3: Selection/reproduction
When selecting/reproducing the chromosome, we
would use the cumulative probability manner of
Roulette Wheel Method, because the objective of
this research is concerned with prot maximum
issue, Roulette Wheel (Goldberg, 1989) was taken
as the reproduction methods of GA in this
research. Roulette is divided into several fan sec-
tions, and the area of each block represents its
probability of being selected, turning the roulette,
and supposing that we would shoot a dart, the
shooting area represents that this individual has
been selected to be reproduced. The size of the
block is related to the value of tness (the objec-
tive function (1) is the only tness function for
the solving model), the larger block is correspond-
ing to the large tness value, and consult which
strip of chromosome have the random numbers
laid on and reproduce this strip of chromosome.
Step 4: Crossover
If the crossover rate is 0.6, the chromosome num-
ber is 50, multiply population by crossover rate
(50 0.6) then we get its crossover quantity 30,
this means that 30 strips of chromosome would
be mated by twos, if the crossover quantity is an
odd number, then make it an even number, and
the selection of crossover chromosome would be
Gene value
Gene cell index
Basic ratio of the pricing gap
between the manufacturer and
the outsourcing factory
Factor of willingness for long-term
cooperation of the manufacturer
and the outsourcing factory
Market competition factor
responding to market changes
0.985~1.015 1~1.02 0.96~0.99
Fig. 8. Chromosome structure.
2056 Z.H. Che / Expert Systems with Applications 36 (2009) 20482061
selected stochastically, the chromosome cannot be
chosen repeatedly, the crossover program would
continue until it has reached the crossover quan-
tity are shown in Fig. 9.
Step 5: Mutation
If the mutation rate is 0.2, the chromosome num-
ber is 50, multiply population by mutation rate
(50 0.2) then we get its mutation quantity 10,
this means that 10 strips of chromosome would
carry out mutation, and the mutation chromo-
some would be selected stochastically, the chro-
mosome cannot be chosen repeatedly, the
mutation program would continue until it has
reached the mutation quantity, its mutation situa-
tion is similar to Fig. 10.
Step 6: Replace of population
The tness function value of each strip of chromo-
some is recomputed, then generating one random
number stochastically(0, 1), and checking which
chromosome has it laid on, and then selecting this
chromosome, the selecting program would con-
tinue till it has reached the original population
number, and the selected chromosome cannot be
repeated, calculating the objective function of all
the selected chromosome, and arranging them
according to the size, if the optimal chromosome
of lial generation is better than the worst chro-
mosome of mother generation, and the lial gener-
ation would replace the mother generation as the
new population, on the other hand we would still
use mother generation to continue next generation
evolution.
Step 7: Termination rule
Repeat steps 47 till we have met the set termina-
tion condition; that is to say, executing the alge-
bra, and it would be terminated when we have
nished running 800 generations and 1000
generations.
0.992
0.992
Gene value
Gene cell index
Basic ratio of the pricing gap
between the manufacturer and
the outsourcing factory
Factor of willingness for long-term
cooperation of the manufacturer
and the outsourcing factory
Market competition factor
responding to market changes
0.972
Gene value
Basic ratio of the pricing gap
between the manufacturer and
the outsourcing factory
Factor of willingness for long-term
cooperation of the manufacturer
and the outsourcing factory
Market competition factor
responding to market changes
1.009 0.967
Chromosome A
Chromosome B
After the crossover
point of tangency
0.992
1.011
1.018
0.992
0.992
Gene value
Gene cell index
Basic ratio of the pricing gap
between the manufacturer and
the outsourcing factory
Factor of willingness for long-term
cooperation of the manufacturer
and the outsourcing factory
Market competition factor
responding to market changes
0.967
Gene value
Basic ratio of the pricing gap
between the manufacturer and
the outsourcing factory
Factor of willingness for long-term
cooperation of the manufacturer
and the outsourcing factory
Market competition factor
responding to market changes
1.018 0.972
Chromosome A
Chromosome B
Before the crossover
point of tangency
0.992
1.011
1.009
Fig. 9. Chromosome crossover.
Z.H. Che / Expert Systems with Applications 36 (2009) 20482061 2057
8. Case analysis
This system interface is shown in Fig. 11, which is con-
structed by the Visual Basic program language, the input
contents contain the manufacturers primary stage price
of the former generation products, the primary stage price
of the OEM, the market share of the primary stage total
output of the manufacture, the primary stage total market
output, besides this, the work force wage rate of the current
period manufacturer, the per unit service cost of capital
equipment, the work force wage rate of OEM and the
per unit service cost of the capital equipment should also
be input, then we could gure out the optimal price and
quantity for the current period manufacturer and OEM,
Fig. 11. Interface of systematic operation.
Gene value
Basic ratio of the pricing gap
between the manufacturer and
the outsourcing factory
Market competition factor
responding to market changes
0.972
ChromosomeA
0.992 1.018
After the mutation
Gene value
Basic ratio of the pricing gap
between the manufacturer and
the outsourcing factory
Market competition factor
responding to market changes
1.018 0.984 0.992
ChromosomeB
Gene cell index
Before the mutation
Factor of willingness for long -term
cooperation of the manufacturer
and the outsourcing factory
Factor of willingness for long -term
cooperation of the manufacturer
and the outsourcing factory
Fig. 10. Chromosome mutation.
2058 Z.H. Che / Expert Systems with Applications 36 (2009) 20482061
respectively by way of the objection formula and restriction
formula, and this could help its appurtenant industries to
reach the object of maximization of total prot, the above
research is shown in Fig. 12.
How could the manufacturer and OEM gure out the
balanced price and quantity facing a certain interval quan-
tity based on the dierent stages of PLC (introducing stage,
growth stage, mature stage and decline stage) to reach the
object of maximal market prot under sustainable cooper-
ation. The data of manufacturer and OEM are shown in
Table 2, which are all based on the given PLC theory
and the PF theory of economics. The basic price dierence
ratio of the OEM and manufacturer, the price of the OEM
is surely lower than the price of the manufacturer, so we
suppose that the range is 0.960.99, and the long-term pol-
icy cooperation factor that the manufacturer wants to
carry out a long-established relation with OEM, the man-
ufacturer has elevated the OEM price for the long-term
Fig. 12. Initiative winwin pricing model in this research.
Table 2
Data of manufacturer and OEM
The inuence of elasticity of the manufacturer and OEM price dierence on the market share of manufacturer 1.2
The inuence of elasticity of average price of the manufacturer and OEM on total output. The parameter corresponding
to the manufacturer work force
1.8
The parameter corresponding to the manufacturer work force 0.6
The parameter corresponding to the OEM work force 0.8
The parameter corresponding to the manufacturer or OEM work force 1
The parameter corresponding to the manufacturer or OEM capital equipment 0.2
PLC
S
1
S
2
S
3
S
4
Manufacturing price/unit 57,000 54,000 51,000 50,000
OEMs price/unit 56,000 53,000 5000 49,000
Possession rate of manufacturer 0.675 0.675 0.675 0.675
Total output 150,000 250,000 340,000 180,000
The wage rate of the manufacturer or OEM 35,000 35,000 35,000 35,000
The per unit service cost of manufacturer or OEM capital equipment 31,200 31,200 31,200 31,200
Capital equipment of manufacturer 120,000 176,800 218,000 111,700
Capital equipment of OEM 44,800 63,400 75,300 38,050
Z.H. Che / Expert Systems with Applications 36 (2009) 20482061 2059
prot consideration, by supposing that the interval is
between 1 and 1.02. The market competition factor corre-
sponding to the market changes, the manufacturer cannot
control the industry prosperity in the environment, so the
price should be raised or lowered at proper time, by sup-
posing the range is 0.9851.015.
This research focuses on the manufacturer and OEM
cost under the PFs of Leontief and Cobb-douglas, when
the population is 50, the lial generation is 800 or 1000
with 0.6 crossover rate and 0.02 mutation rate (Ladd,
1996; Thierens & Goldberg, 1993), inserting the input value
according to Table 2 and estimating the price and output of
the manufacturer and OEM, which could meet the demand
of market prot maximization in dierent stages of the
PLC.
Adopt the Leontief PF. After the algorithm computa-
tion of target equations and limiting equations, we can nd
that the maximized market prot at S
1
, S
2
, S
3
and S
4
are as
shown in Table 3. Besides, the respective most appropriate
price and reserved capacity of manufacturer and OEM to
reach long-term cooperation are also shown in Table 3 in
dierent stage of PLC (S
1
, S
2
, S
3
, S
4
). Table 3 summarizes
the results under Leontief PF before and after using the
proposed solving method. Analyses substantiated that the
results are all improved. For instance, the prot of before
computation at stage S
1
is 10,559,027 (7.65%) better than
the after of 127,440,973. All other prots at stages S
2
,
S
3
and S
4
for the after computation have also shown de-
nite improvement over the before. Explicitly, prots at S
2
,
S
3
and S
4
have improved by 0.85%, 1.65% and 3.84%,
respectively. In addition, the comparative results of before
and after computation under Cobb-douglas PF are shown
in Table 4. The results show the prot at each stage has def-
inite improvement.
9. Conclusions
The initiative winwin pricing model rst focuses on the
market surplus which has eectively helped its appurtenant
industry to gain the maximization of the total prot. This
research rstly focused on the market surplus, then on the
market share of manufacturer and OEMoutput, and the rel-
ative price dierence ratio of the products of all the genera-
tions is also a key factor to inuence the market share, by
doing this; it has replaced the one-sided elastic eect of
traditional research.
And the pricing model of this research included the mar-
ket competition factor corresponding to market changes,
the price dierence ratio between the OEM and manufac-
turer, and the long-term policy cooperation factor of the
Table 3
Results of Leontiefs PF at each PLC stage
PF: Leontief PLC
S
1
S
2
S
3
S
4
Before Prot 138,000,000 105,760,000 165,040,000 79,800,000
Manufacturing price 57,000 54,000 51,000 50,000
Output of manufacturer 101,250 168,750 229,500 121,500
OEMs price 56,000 53,000 50,000 49,000
Output of OEM 48,750 81,250 110,500 58,500
After Prot 127,440,973 106,660,328 167,764,122 82,866,112
Manufacturing price 56,145 53,622 51,204 50,400
Reserved capacity of manufacturer 103,901 171,385 229,190 120,568
OEMs price 55,114 52,798 50,523 49,777
Reserved capacity of OEM 50,258 81,054 106,347 55,581
% Improve Prot 7.65 0.85 1.65 3.84
Table 4
Results of Cobb-douglass PF at each PLC stage
PF: Cobb-douglas PLC
S
1
S
2
S
3
S
4
Before Prot 138,963,740 113,754,657 171,132,616 72,464,866
Manufacturing price 57,000 54,000 51,000 50,000
Output of manufacturer 101,250 168,750 229,500 121,500
OEMs price 56,000 53,000 50,000 49,000
Output of OEM 48,750 81,250 110,500 58,500
After Prot 134,817,594 114,762,284 174,139,653 75,900,383
Manufacturing price 56,145 53,568 51,153 50,400
Reserved capacity of manufacturer 103,836 171,800 229,834 120,669
OEMs price 55,078 52,782 50,539 49,826
Reserved capacity of OEM 50,409 80,935 105,972 55,319
Prot 2.98 0.9 1.76 4.74
2060 Z.H. Che / Expert Systems with Applications 36 (2009) 20482061
manufacturer when it wants to build a long-established
relation with OEM to pursue the maximization of prot.
The initiative winwin model constructed by this research
takes the PLC as integral basis, reposes the PF on cost
level, and has changed the relevant factors in quantity
and time directions, it has considered the possibility of
dynamic variations caused by time changes in hopes that
it could provide a perfect program for the price decision
of the enterprise. The numerical analysis result shows that
after genetic algorithm, these factors could gure out the
optimal value based on the conditions of restriction for-
mula, and display the benet of initiative model in good
time.
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