Temporary Price Changes During Replenishment Leadtime
Posted: 25 Sep 2014 Last revised: 13 May 2015
Date Written: August 1, 2014
Dynamic pricing may lead to better supply-demand match by approaching from the demand side in a price dependent market. When the inventory is scarce, a price change hedges for more effective use of available inventory. We study a temporary price change policy for a non-perishable product that is continuously reviewed for replenishment. While a regular competitive market price is charged under reasonable inventory levels, during the leadtime of a replenishment order, the firm may apply a temporary price increase. The aim is to increase expected profits by raising revenues from available units, while lowering the demand rate to incur lower stock-out costs for unsatisfied demand. Our interest is to gain insight about the benefits of such a temporary pricing policy and its effects on regular replenishment policy by simultaneously optimizing for regular replenishment and price change decision variables. Through extensive numerical analyses, we show that significant increases in expected profits can be obtained over a conventional single price policy. Significant improvements in profits are attainable even with more simplified policies where a sequential optimization of replenishment and price change is made instead of a computationally challenging simultaneous optimization.
Keywords: pricing, continuous review, lost sales, inventory control, emergency control
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