Dynamic pricing and advertising of perishable products with inventory holding costs

Rainer Schlosser

Journal of Economic Dynamics and Control, 2015, vol. 57, issue C, 163-181

Abstract: We examine a special class of dynamic pricing and advertising models for the sale of perishable goods, including marginal unit costs and inventory holding costs. The time horizon is assumed to be finite and we allow several model parameters to be dependent on time. For the stochastic version of the model, we derive closed-form expressions of the value function as well as of the optimal pricing and advertising policy in feedback form. Moreover, we show that for small unit shares, the model converges to a deterministic version of the problem, whose explicit solution is characterized by an overage and an underage case. We quantify the close relationship between the open-loop solution of the deterministic model and the expected evolution of optimally controlled stochastic sales processes. For both models, we derive sensitivity results. We find that in the case of positive holding costs, on average, optimal prices increase in time and advertising rates decrease. Furthermore, we analytically verify the excellent quality of optimal feedback policies of deterministic models applied in stochastic models.

Keywords: Dynamic pricing and advertising; Optimal stochastic and deterministic control; Inventory holding costs; Finite horizon; Feedback heuristics (search for similar items in EconPapers)
JEL-codes: C61 D42 M37 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:57:y:2015:i:c:p:163-181

DOI: 10.1016/j.jedc.2015.05.017

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