Optimal Release of Inventory Using Online Auctions: The Two Item Case

59 Pages Posted: 5 Oct 2006

See all articles by Fredrik Odegaard

Fredrik Odegaard

University of British Columbia (UBC) - Division of Operations and Logistics

Martin L. Puterman

University of British Columbia (UBC) - Division of Operations and Logistics

Date Written: October 3, 2006

Abstract

In this paper we analyze policies for optimally disposing inventory using online auctions. We assume a seller has a fixed number of items to sell using a sequence of, possibly overlapping, single-item auctions. The decision the seller must make is when to start each auction. The decision involves a trade-off between a holding cost for each period an item remains unsold, and a higher expected final price the fewer the number of simultaneous auctions underway. Consequently the seller must trade-off the expected marginal gain for the ongoing auctions with the expected marginal cost of the unreleased items by further deferring their release. We formulate the problem as a discrete time Markov Decision Problem and consider two cases. In the first case we assume the auctions are guaranteed to be successful, while in the second case we assume there is a positive probability that an auction receives no bids. The reason for considering these two cases are that they require different analysis. We derive conditions to ensure that the optimal release policy is a control limit policy in the current price of the ongoing auctions, and provide several illustration of results. The paper focuses on the two item case which has sufficient complexity to raise challenging questions.

Keywords: Online Auctions, Price Cannibalization, Strategic Auction Release, Markov Decision Process

Suggested Citation

Odegaard, Fredrik and Puterman, Martin L., Optimal Release of Inventory Using Online Auctions: The Two Item Case (October 3, 2006). Available at SSRN: https://ssrn.com/abstract=934942 or http://dx.doi.org/10.2139/ssrn.934942

Fredrik Odegaard (Contact Author)

University of British Columbia (UBC) - Division of Operations and Logistics ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Martin L. Puterman

University of British Columbia (UBC) - Division of Operations and Logistics ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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