Joint Dynamic Pricing of Multiple Perishable Products Under Consumer Choice
Production and Operations Management, Vol. 19, No. 3, pp. 279–304, May/June 2010
17 Pages Posted: 21 Nov 2011
In response to competitive pressures, firms are increasingly adopting revenue management opportunities afforded by advances in information and communication technologies. Motivated by these revenue management initiatives in industry, we consider a dynamic pricing problem facing a firm that sells given initial inventories of multiple substitutable and perishable products over a finite selling horizon. Because the products are substitutable, individual product demands are linked through consumer choice processes. Hence, the seller must formulate a joint dynamic pricing strategy while explicitly incorporating consumer behavior. For an integrative model of consumer choice based on linear random consumer utilities, we model this multiproduct dynamic pricing problem as a stochastic dynamic program and analyze its optimal prices.
The consumer choice model allows us to capture the linkage between product differentiation and consumer choice, and readily specializes to the cases of verticallyand horizontallydif ferentiated assortments. When products are vertically differentiated, our results show monotonicity properties (with respect to quality, inventory, and time) of the optimal prices and reveal that the optimal price of a product depends on higher qualitypr oduct inventories only through their aggregate inventory rather than individual availabilities. Furthermore, we show that the price of a product can be decomposed into the price of its adjacent lower qualitypr oduct and a markup over this price, with the markup depending solely on the aggregate inventory. We exploit these properties to develop a polynomial-time, exact algorithm for determining the optimal prices and the profit. For a horizontally differentiated assortment, we show that the profit function is unimodal in prices. We also show that individual, rather than aggregate, product inventory availability drives pricing. However, we find that monotonicity properties observed in vertically differentiated assortments do not hold.
Keywords: dynamic pricing, revenue management, perishable products, consumer choice, vertical and horizontal product assortments, efficient algorithm
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