Inventory, Discounts, and the Timing Effect

Manufacturing & Service Operations Management, 2008

28 Pages Posted: 21 Nov 2010 Last revised: 27 Dec 2010

See all articles by Hyun-Soo Ahn

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business

M. Gumus

McGill University - Desautels Faculty of Management

Philip Kaminsky

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Date Written: November 19, 2008

Abstract

We introduce and analyze a model that explicitly considers the timing effect of intertemporal pricing – the concept, found in practice, that demand during a sale is increasing in the time since the last sale. We present structural results that characterize the interaction between the decision to hold a sale and the inventory ordering decision. We show that the optimal inventory ordering policy is a state-dependent base stock policy; however, the optimal pricing policy can be quite complicated due to both the value and the cost of holding inventory and delaying sales. In our computational analysis, we find that compared to a fixed price policy, we see an average gain in profit of almost 5 percent from optimally varying promotion and inventory decisions accounting for intertemporal demand, and we find that this potential profit gain increases as demand variability decreases. We also develop a heuristic based on deterministic pricing, and find that it performs well relative to the optimal policy.

Suggested Citation

Ahn, Hyun-Soo and Gumus, Mehmet and Kaminsky, Philip, Inventory, Discounts, and the Timing Effect (November 19, 2008). Manufacturing & Service Operations Management, 2008. Available at SSRN: https://ssrn.com/abstract=1712064

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Mehmet Gumus (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Philip Kaminsky

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

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