An Extended Pricing and Inventory Control Model
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