Dynamic Pricing of Limited Inventories When Customers Negotiate

Chia-Wei Kuo (), Hyun-Soo Ahn () and Göker Aydın ()
Additional contact information
Chia-Wei Kuo: Department of Business Administration, National Taiwan University, Taipei, Taiwan
Hyun-Soo Ahn: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Göker Aydın: Kelley School of Business, Indiana University, Bloomington, Indiana 47405

Operations Research, 2011, vol. 59, issue 4, 882-897

Abstract: Although take-it-or-leave-it pricing is the main mode of operation for many retailers, a number of retailers discreetly allow price negotiation when some haggle-prone customers ask for a bargain. At these retailers, the posted price, which itself is subject to dynamic adjustments in response to the pace of sales during the selling season, serves two important roles: (i) it is the take-it-or-leave-it price to many customers who do not bargain, and (ii) it is the price from which haggle-prone customers negotiate down. To effectively measure the benefit of dynamic pricing and negotiation in such a retail environment, one must take into account the interactions among inventory, dynamic pricing, and negotiation. The outcome of the negotiation (and the final price a customer pays) depends on the inventory level, the remaining selling season, the retailer's bargaining power, and the posted price. We model the retailer's dynamic pricing problem as a dynamic program, where the revenues from both negotiation and posted pricing are embedded in each period. We characterize the optimal posted price and the resulting negotiation outcome as a function of inventory and time. We also show that negotiation is an effective tool to achieve price discrimination, particularly when the inventory level is high and/or the remaining selling season is short, even when implementing negotiation is costly.

Keywords: inventory/production; uncertainty; stochastic; inventory/production; policies; marketing/pricing; dynamic programming; models; applications (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://dx.doi.org/10.1287/opre.1100.0903 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:59:y:2011:i:4:p:882-897

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().