Disruption Mitigation and Pricing Flexibility

We study a firm that is exposed to random supply chain disruptions while producing a single product. During a disruption, the firm may use reserve inventory and/or reserve capacity to serve customer demand. As supply in the form of reserve inventory and reserve capacity is often lower than demand during a disruption, the firm may choose to increase the price of the product during the disruption. An increase in price reduces demand during the disruption, which may help better match supply and demand during the disruption. We find that pricing flexibility (i.e., the ability to increase the price during a disruption) may complement or substitute the operational mitigation levers of holding reserve inventory or reserve capacity. Specifically, when a firm has pricing flexibility, it may be economical to increase or decrease the use of reserve inventory or reserve capacity relative to a setting without pricing flexibility.