Joint Inventory‐Pricing Optimization with General Demands: An Alternative Approach for Concavity Preservation

Alain Bensoussan, Yangyang Xie and Houmin Yan

Production and Operations Management, 2019, vol. 28, issue 9, 2390-2404

Abstract: In this study, we provide an alternative approach for proving the preservation of concavity together with submodularity, and apply it to finite‐horizon non‐stationary joint inventory‐pricing models with general demands. The approach characterizes the optimal price as a function of the inventory level. Further, it employs the Cauchy–Schwarz and arithmetic‐geometric mean inequalities to establish a relation between the one‐period profit and the profit‐to‐go function in a dynamic programming setting. With this relation, we demonstrate that the one‐dimensional concavity of the price‐optimized profit function is preserved as a whole, instead of separately determining the (two‐dimensional) joint concavities in price (or mean demand/risk level) and inventory level for the one‐period profit and the profit‐to‐go function in conventional approaches. As a result, we derive the optimality condition for a base‐stock, list‐price (BSLP) policy for joint inventory‐pricing optimization models with general form demand and profit functions. With examples, we extend the optimality of a BSLP policy to cases with non‐concave revenue functions in mean demand. We also propose the notion of price elasticity of the slope (PES) and articulate the condition as that in response to a price change of the commodity, the percentage change in the slope of the expected sales is greater than the percentage change in the slope of the expected one‐period profit. The concavity preservation conditions for the additive, generalized additive, and location‐scale demand models in the literature are unified under this framework. We also obtain the conditions under which a BSLP policy is optimal for the logarithmic and exponential form demand models.

Date: 2019
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