A sequential dynamic pricing model and its applications

Consider a sequential dynamic pricing model where a seller sells a given stock to a random number of customers. Arriving one at a time, each customer will purchase one item if the product price is lower than her personal reservation price. The seller's objective is to post a potentially different price for each customer in order to maximize the expected total revenue. We formulate the seller's problem as a stochastic dynamic programming model, and develop an algorithm to compute the optimal policy. We then apply the results from this sequential dynamic pricing model to the case where customers arrive according to a continuous‐time point process. In particular, we derive tight bounds for the optimal expected revenue, and develop an asymptotically optimal heuristic policy. © 2004 Wiley Periodicals, Inc. Naval Research Logistics, 2004.     

Vertically restrictive pricing in supply chains with price‐dependent demand

We examine the behavior of a manufacturer and a retailer in a decentralized supply chain under price‐dependent, stochastic demand. We model a retail fixed markup (RFM) policy, which can arise as a form of vertically restrictive pricing in a supply chain, and we examine its effect on supply chain performance. We prove the existence of the optimal pricing and replenishment policies when demand has a linear additive form and the distribution of the uncertainty component has a nondecreasing failure rate. We numerically compare the relative performance of RFM to a price‐only contract and we find that RFM results in greater profit for the supply chain than the price‐only contract in a variety of scenarios. We find that RFM can lead to Pareto‐improving solutions where both the supplier and the retailer earn more profit than under a price‐only contract. Finally, we compare RFM to a buyback contract and explore the implications of allowing the fixed markup parameter to be endogenous to the model. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006.     

Sensitivity analysis on responsive pricing and production under imperfect demand updating

This paper examines three types of sensitivity analysis on a firm's responsive pricing and responsive production strategies under imperfect demand updating. Demand has a multiplicative form where the market size updates according to a bivariate normal model. First, we show that both responsive production and responsive pricing resemble the classical pricing newsvendor with posterior demand uncertainty in terms of the optimal performance and first‐stage decision. Second, we show that the performance of responsive production is sensitive to the first‐stage decision, but responsive pricing is insensitive. This suggests that a “posterior rationale” (ie, using the optimal production decision from the classical pricing newsvendor with expected posterior uncertainty) allows a simple and near‐optimal first‐stage production heuristic for responsive pricing. However, responsive production obtains higher expected profits than responsive pricing under certain conditions. This implies that the firm's ability to calculate the first‐stage decision correctly can help determine which responsive strategy to use. Lastly, we find that the firm's performance is not sensitive to the parameter uncertainty coming from the market size, total uncertainty level and information quality, but is sensitive to uncertainty originating from the procurement cost and price‐elasticity.     

Synchronizing pricing and replenishment to serve forward-looking customers

We incorporate strategic customer waiting behavior in the classical economic order quantity (EOQ) setting. The seller determines not only the timing and quantities of the inventory replenishment, but also the selling prices over time. While similar ideas of market segmentation and intertemporal price discrimination can be carried over from the travel industries to other industries, inventory replenishment considerations common to retail outlets and supermarkets introduce additional features to the optimal pricing scheme. Specifically, our study provides concrete managerial recommendations that are against the conventional wisdom on “everyday low price” (EDLP) versus “high-low pricing” (Hi-Lo). We show that in the presence of inventory costs and strategic customers, Hi-Lo instead of EDLP is optimal when customers have homogeneous valuations. This result suggests that because of strategic customer behavior, the seller obtains a new source of flexibility—the ability to induce customers to wait—which always leads to a strictly positive increase of the seller's profit. Moreover, the optimal inventory policy may feature a dry period with zero inventory, but this period does not necessarily result in a loss of sales as customers strategically wait for the upcoming promotion. Furthermore, we derive the solution approach for the optimal policy under heterogeneous customer valuation setting. Under the optimal policy, the replenishments and price promotions are synchronized, and the seller adopts high selling prices when the inventory level is low and plans a discontinuous price discount at the replenishment point when inventory is the highest.     

When to commit in a serial supply chain with forecast updating

Negotiations between an end product manufacturer and a parts supplier often revolve around two main issues: the supplier's price and the length of time the manufacturer is contractually held to its order quantity, commonly termed the “commitment time frame.” Because actual demand is unknown, the specification of the commitment time frame determines how the demand risk is shared among the members of the supply chain. Casual observation indicates that most manufacturers prefer to delay commitments as long as possible while suppliers prefer early commitments. In this paper, we investigate whether these goals are always in the firm's best interest. In particular, we find that the manufacturer may sometimes be better off with a contract that requires an early commitment to its order quantity, before the supplier commits resources and the supplier may sometimes be better off with a delayed commitment. We also find that the preferred commitment time frame depends upon which member of the supply chain has the power to set their exchange price. © 2003 Wiley Periodicals, Inc. Naval Research Logistics, 2003     

Competition under time‐varying demands and dynamic lot sizing costs

We develop a competitive pricing model which combines the complexity of time‐varying demand and cost functions and that of scale economies arising from dynamic lot sizing costs. Each firm can replenish inventory in each of the T periods into which the planning horizon is partitioned. Fixed as well as variable procurement costs are incurred for each procurement order, along with inventory carrying costs. Each firm adopts, at the beginning of the planning horizon, a (single) price to be employed throughout the horizon. On the basis of each period's system of demand equations, these prices determine a time series of demands for each firm, which needs to service them with an optimal corresponding dynamic lot sizing plan. We establish the existence of a price equilibrium and associated optimal dynamic lotsizing plans, under mild conditions. We also design efficient procedures to compute the equilibrium prices and dynamic lotsizing plans.© 2008 Wiley Periodicals, Inc. Naval Research Logistics 2009     

Locational tying of complementary retail items

We study a selling practice that we refer to as locational tying (LT), which seems to be gaining wide popularity among retailers. Under this strategy, a retailer “locationally ties” two complementary items that we denote by “primary” and “secondary.” The retailer sells the primary item in an appropriate “department” of his or her store. To stimulate demand, the secondary item is offered in the primary item's department, where it is displayed in very close proximity to the primary item. We consider two variations of LT: In the multilocation tying strategy (LT‐M), the secondary item is offered in its appropriate department in addition to the primary item's department, whereas in the single‐location tying strategy (LT‐S), it is offered only in the primary item's location. We compare these LT strategies to the traditional independent components (IC) strategy, in which the two items are sold independently (each in its own department), but the pricing/inventory decisions can be centralized (IC‐C) or decentralized (IC‐D). Assuming ample inventory, we compare and provide a ranking of the optimal prices of the four strategies. The main insight from this comparison is that relative to IC‐D, LT decreases the price of the primary item and adjusts the price of the secondary item up or down depending on its popularity in the primary item's department. We also perform a comparative statics analysis on the effect of demand and cost parameters on the optimal prices of various strategies, and identify the conditions that favor one strategy over others in terms of profitability. Then we study inventory decisions in LT under exogenous pricing by developing a model that accounts for the effect of the primary item's stock‐outs on the secondary item's demand. We find that, relative to IC‐D, LT increases the inventory level of the primary item. We also link the profitability of different strategies to the trade‐off between the increase in demand volume of the secondary item as a result of LT and the potential increase in inventory costs due to decentralizing the inventory of the secondary item. © 2009 Wiley Periodicals, Inc. Naval Research Logistics 2009     

Nonlinear pricing with consumer satiation

In various scenarios, consumers may become satiated with products, and the degree of satiation is directly associated with their prior experiences. Confronted with consumer satiation, the seller is unable to either identify consumers who have a higher likelihood of being satiated ex ante or distinguish satiated from non‐satiated consumers ex post. Therefore, the seller should address dynamic selling, valuation uncertainty, and quantity decisions, all of which are important operational issues. We consider a two‐period problem in which consumer types are influenced by their prior consumption experiences. Faced with these consumers, the seller intends to optimize quantities and adjust the prices of the products in each period to maximize revenue. We find that the seller may reduce ex ante production quantity as some consumers become satiated. Moreover, the ex ante quantity is first decreasing and then increasing with regard to the satiation rate. Furthermore, two‐period information asymmetries may provide a rationale for upward distortion in quantity when consumer preferences are highly sensitive to first‐period consumption. © 2016 Wiley Periodicals, Inc. Naval Research Logistics 63: 386–400, 2016     

The impact of manufacturer rebates on supply chain profits

Manufacturer rebates are commonly used as price discount tools for attracting end customers. In this study, we consider a two‐stage supply chain with a manufacturer and a retailer, where a single seasonal product faces uncertain and price‐sensitive demand. We characterize the impact of a manufacturer rebate on the expected profits of both the manufacturer and the retailer. We show that unless all of the customers claim the rebate, the rebate always benefits the manufacturer. Our results thus imply that “mail‐in rebates,” where some customers end up not claiming the rebate, particularly when the size of the rebate is relatively small, always benefit the manufacturer. On the other hand, an “instant rebate,” such as the one offered in the automotive industry where every customer redeems the rebate on the spot when he/she purchases a car, does not necessarily benefit the manufacturer. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007     

Integrated capacity,demand, and production planning with subcontracting and overtime options

Models for integrated production and demand planning decisions can serve to improve a producer's ability to effectively match demand requirements with production capabilities. In contexts with price‐sensitive demands, economies of scale in production, and multiple capacity options, such integrated planning problems can quickly become complex. To address these complexities, this paper provides profit‐maximizing production planning models for determining optimal demand and internal production capacity levels under price‐sensitive deterministic demands, with subcontracting and overtime options. The models determine a producer's optimal price, production, inventory, subcontracting, overtime, and internal capacity levels, while accounting for production economies of scale and capacity costs through concave cost functions. We use polyhedral properties and dynamic programming techniques to provide polynomial‐time solution approaches for obtaining an optimal solution for this class of problems when the internal capacity level is time‐invariant. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007