Welfare Implications of Inventory-Driven Dynamic Pricing

56 Pages Posted: 6 Mar 2017 Last revised: 4 May 2018

Date Written: March 4, 2017

Abstract

We argue that dynamic pricing motivated by the management of inventory holding and ordering costs leads to increased operational efficiencies which could benefit firms without hurting consumers. To demonstrate this point, we equip the traditional economic order quantity (EOQ) setting with a rich set of demand models and compare social outcomes under two alternatives, dynamic and static pricing. We show that dynamic pricing generates higher retailer profits, a lower average price per unit sold, and higher sales volumes than static pricing. The mechanism behind the result is that with dynamic pricing the retailer ties the price of each unit to its holding costs, which allows him to increase the order quantity compared to static pricing and thus save on fixed ordering costs. Some of these cost savings are passed to consumers. Moreover, we demonstrate that this mechanism is robust to the presence of price-anticipating (strategic) consumer behavior.

Keywords: Dynamic Pricing, Welfare Analysis, Inventory Management, Revenue Management

Suggested Citation

Stamatopoulos, Ioannis and Chehrazi, Naveed and Bassamboo, Achal, Welfare Implications of Inventory-Driven Dynamic Pricing (March 4, 2017). Available at SSRN: https://ssrn.com/abstract=2927521 or http://dx.doi.org/10.2139/ssrn.2927521

Ioannis Stamatopoulos (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

2110 Speedway B6000
Austin, TX 78705
United States

Naveed Chehrazi

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Achal Bassamboo

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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