Joint pricing and production decisions with yield uncertainty and downconversion

We consider a firm who supplies two types of products: high-end and low-end. Because of the uncertainty in the production process, the yield rate of the high-end products is uncertain. The substandard high-end products caused by the yield uncertainty can be transformed into the low-end products with a certain cost. We characterize the optimal pricing and production decisions and develop an algorithm to compute the optimal solution. We also investigate the impact of the yield uncertainty on the firm's performance, and explore how stability of market demand, emergent fulfillment costs, and downconversion cost influence this effect. We find that (i) the profit of the firm deteriorates when the risk of the yield uncertainty is high. In the face of yield uncertainty, the firm prefers to decrease (increase) the production quantity of the high-end (low-end) products; (ii) when the market demands are quite unstable, the emergent fulfillment costs are low, or the downconversion cost is high, the firm has a low incentive to eliminate the yield uncertainty.