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Optimal Pricing and Order-Up-To S Inventory Policy with Expected Utility of the Present Value Criterion

B.C. Giri

The Engineering Economist, 2015, vol. 60, issue 3, 231-244

Abstract: The article determines pricing and order-up-to level S inventory decisions over an infinite planning horizon from the point of view of a risk-averse decision maker. The demand is assumed to be stochastic but influenced by the selling price which is a decision variable. Shortages are allowed and backordered partially. We calculate the present value of the cash flow over the entire planning horizon and incorporate the notion of risk aversion into the model using a concave utility function. We numerically demonstrate the model and investigate the impact of different model-parameters on the optimal decisions. It is observed that the optimal selling price for a risk-averse decision maker is not less than the optimal selling price of a risk-neutral decision maker while the optimal order level for the risk-averse decision maker is always less than that of the risk-neutral decision maker.

Date: 2015
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Handle: RePEc:taf:uteexx:v:60:y:2015:i:3:p:231-244