Integrating Dynamic Pricing and Replenishment Decisions Under Supply Capacity Uncertainty

Management Science, 56(12) 2154-2172

39 Pages Posted: 14 Nov 2010 Last revised: 12 Nov 2012

See all articles by Qi Feng

Qi Feng

Purdue University - Krannert School of Management

Date Written: July 22, 2010

Abstract

This paper examines an integrated decision-making process regarding pricing for uncertain demand and sourcing from uncertain supply, which are often studied separately in the literature. Our analysis of the integrated system suggests that the base stock list price policy fails to achieve optimality even under deterministic demand. Instead, the optimal policy is characterized by two critical values: a reorder point and a target safety stock. Under this policy, a positive order is issued if and only if the inventory level is below the reorder point. When this happens, the optimal order and price are coordinated to achieve a constant target safety stock, which aims at hedging the demand uncertainty. We further investigate the profit improvement obtained from deploying dynamic pricing, as opposed to static pricing. Our results indicate that either supply limit or supply uncertainty may induce a significant benefit from dynamic pricing, and the compound effect of supply limit and uncertainty can be much more pronounced than the individual effects. Whether or not the supply capacity is limited has a major implication on the value of dynamic pricing. Under unlimited supply, dynamic pricing is more valuable when procurement cost is high or when demand is more sensitive to price. With limited supply, however, the capacity restriction tends to be relaxed, reducing the value of dynamic pricing.

Keywords: Dynamic Pricing, Inventory, Supply Uncertainty

Suggested Citation

Feng, Qi, Integrating Dynamic Pricing and Replenishment Decisions Under Supply Capacity Uncertainty (July 22, 2010). Management Science, 56(12) 2154-2172, Available at SSRN: https://ssrn.com/abstract=1652003

Qi Feng (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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