On the optimality of reflection control, with production-inventory applications

Abstract

We study the control of a Brownian motion (BM) with a negative drift, so as to minimize a long-run average cost objective. We show the optimality of a class of reflection controls that prevent the BM from dropping below some negative level r, by cancelling out from time to time part of the negative drift; and this optimality is established for any holding cost function h(x) that is increasing in x ≥ 0 and decreasing in x ≤ 0. Furthermore, we show the optimal reflection level can be derived as the fixed point that equates the long-run average cost to the holding cost. We also show the asymptotic optimality of this reflection control when it is applied to production-inventory systems driven by discrete counting processes.