An integrated customer-manufacturer optimization model to determine the optimal product price and quality level using theory of utility

In facing market competition, companies are required to conduct a good strategy of pricing. By determining the right product price and quality in accordance with customer preferences, the company gains higher competitive advantages. These preferences towards risk caused by uncertainties can be expressed using utility function. In this study, we develop an integrated customer-manufacturer based optimization model using utility theory. We bridge the preferences between customer and manufacturer by minimizing the gap of utility between both parties. Several constraints are considered, including marginal profit constraint and customer utility constraint. Demand is considered to be price sensitive with a linear function. By optimizing the model, we get the information about the optimal product price and quality, in term of tolerance. We present a numerical example and sensitivity analysis to illustrate the application and feasibility of the proposed model.