Synchronizing Pricing and Replenishment to Serve Forward-Looking Customers with Lost Sales

34 Pages Posted: 8 Aug 2018

See all articles by Ying-Ju Chen

Ying-Ju Chen

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management

Leon Yang Chu

University of Southern California - Data Sciences and Operations; Cheung Kong Graduate School of Business

Date Written: July 1, 2018

Abstract

[Problem Definition] We incorporate heterogeneous customer valuation and the strategic customer behavior in the classical economic order quantity (EOQ) setting. The seller incurs setup costs when replenishing inventory, and can set the prices differently over time and implement capacity rationing. [Academic/ Practical Relevance] While similar ideas of market segmentation and intertemporal price discrimination can be carried over from the travel industries to other industries, there are new aspects when applying these concepts to retail outlets and supermarkets, because they usually face inventory replenishment problems. This makes the joint inventory replenishment and revenue management problem imperative. [Methodology] We adopt the mechanism design and dynamic programming approaches. [Results] We establish the optimality of cyclic intertemporal price discrimination, even if the customers are endowed with homogeneous valuations. Under the optimal policy, the replenishments and price promotions are synchronized, and the seller adopts the highest selling price when the inventory level is the lowest and plans discontinuous price discount at the replenishment point when the inventory is the highest. We also show that, under inventory-based pricing there is a direct mapping between deterministic and stochastic arrivals scenarios, and randomness on the arrivals per se does not alter the structure of the optimal policy. [Managerial Implications] This cyclic pricing scheme offers a stark contrast to the "low-price-every-day" scheme and achieves overall higher profit because customer strategic behavior offers additional flexibility to the seller in managing his inventory. Furthermore, because strategic customers are willingly backlogged, this creates opportunities for the seller to work with the customers to achieve a lower operational cost and a higher overall profit.

Keywords: strategic customer, mechanism design, dynamic pricing, capacity rationing

Suggested Citation

Chen, Ying-Ju and Chu, Leon Yang, Synchronizing Pricing and Replenishment to Serve Forward-Looking Customers with Lost Sales (July 1, 2018). Available at SSRN: https://ssrn.com/abstract=3216549 or http://dx.doi.org/10.2139/ssrn.3216549

Ying-Ju Chen (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Leon Yang Chu

University of Southern California - Data Sciences and Operations ( email )

701 Exposition Blvd
Los Angeles, CA
United States

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
31
Abstract Views
252
PlumX Metrics