Integration of Inventory and Pricing Decisions with Costly Price Adjustments

Xin Chen (), Sean X. Zhou () and Youhua (Frank) Chen ()
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Xin Chen: Industrial Enterprise and Systems Engineering, University of Illinois at Urbana--Champaign, Urbana, Illinois 61801
Sean X. Zhou: Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Hong Kong
Youhua (Frank) Chen: Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Hong Kong

Operations Research, 2011, vol. 59, issue 5, 1144-1158

Abstract: Motivated by the widespread adoption of dynamic pricing in industry and the empirical evidence of costly price adjustments, in this paper we consider a periodic-review inventory model with price adjustment costs that consist of both fixed and variable components. In each period, demand is stochastic and price-dependent. The firm needs to coordinate the pricing and inventory replenishment decisions in each period to maximize its total discounted profit over a finite planning horizon. We develop the general model and characterize the optimal policies for two special scenarios, namely, a model with inventory carryover and no fixed price-change costs and a model with fixed price-change costs and no inventory carryover . Finally, we propose an intuitive heuristic policy to tackle the general system whose optimal policy is expected to be very complicated. Our numerical studies show that this heuristic policy performs well.

Keywords: inventory system; pricing; price adjustment costs; fixed costs; base-stock (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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