An Extended Pricing and Inventory Control Model


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Abstract

In recent years efforts for a joint optimization of the supply (procurement, production)

and the demand side (price, promotion) have neglected demand side dynamics. In

this work, we study inventory models, where demand is sensitive to the firm’s pricing

history. Consumers purchase decisions are founded not only on the reaction to the

current price, but also on deviations from a reference price formed on the basis of past

purchases. Prices are perceived as discounts or surcharges relative to the reference

price. In recent works of e.g. Thomas (1974), Federgruen and Heching (1999), Chen

and Simchi-Levi (2004a) and Chen and Simchi-Levi (2004b) price promotion was used

as a tool to decrease high stock and thus increase profit by reducing expensive holding

costs as a consequence of an increase in demand. In Greenleaf (1995), Kopalle et al.

(1996) and Popescu and Wu (2006) a promotion can raise profit only if the gain that

these effects create in the promotion period outweighs the loss they create in future

periods. In this work we analyze a combined stochastic pricing and inventory control

model of a monopolistic firm based on periodic review.

 

Contact information:

Moritz Fleischmann

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