The motivation for temperature sensitive pricing

The motivation for temperature sensitive pricing at the soda machine;

An example

Here is a highly simplified example to illustrate the revenue potential of changing soda prices with temperature.

Suppose that:

the temperature at 9:00 AM is 60 degrees and it increases by 3 degrees per hour until 10:00PM,

there are a maximum of 300 cans of soda to be sold between 9:00 AM and 10:00PM,

the demand for soda is given by:

Cans sold per hour = 0.7 * (average temperature) - 20 * Price

the machine only accepts nickels, dimes, and quarters.

What is the revenue maximizing price if a single price must be set for the full day?

If the price can be changed once during the day, what are the revenue maximizing prices? At what temperature (or what time) should the price be changed? What is the revenue gain?

If price can be changed at any time, what are the revenue maximizing prices and what temperatures should prices be changed? What is the revenue gain?

The first five correct solutions submitted to mailto:newsed@strategicmanagementscience.com will receive a free subscription to Strategic OR/MS News.

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