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Integration of Inventory and Pricing Decisions with Costly Price Adjustments

Author

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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)

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.

Suggested Citation

  • Xin Chen & Sean X. Zhou & Youhua (Frank) Chen, 2011. "Integration of Inventory and Pricing Decisions with Costly Price Adjustments," Operations Research, INFORMS, vol. 59(5), pages 1144-1158, October.
    • Handle: RePEc:inm:oropre:v:59:y:2011:i:5:p:1144-1158
    DOI: 10.1287/opre.1110.0946
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    References listed on IDEAS

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    3. Brahimi, Nadjib & Absi, Nabil & Dauzère-Pérès, Stéphane & Nordli, Atle, 2017. "Single-item dynamic lot-sizing problems: An updated survey," European Journal of Operational Research, Elsevier, vol. 263(3), pages 838-863.
    4. Bruno Karoubi & R駩s Chenavaz, 2015. "Prices for cash and cash for prices? Theory and evidence on convenient pricing," Applied Economics, Taylor & Francis Journals, vol. 47(38), pages 4102-4115, August.
    5. Ioannis Stamatopoulos & Achal Bassamboo & Antonio Moreno, 2021. "The Effects of Menu Costs on Retail Performance: Evidence from Adoption of the Electronic Shelf Label Technology," Management Science, INFORMS, vol. 67(1), pages 242-256, January.
    6. Ahmadi-Javid, Amir & Hoseinpour, Pooya, 2015. "A location-inventory-pricing model in a supply chain distribution network with price-sensitive demands and inventory-capacity constraints," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 82(C), pages 238-255.
    7. Chen, Jing & Dong, Ming & Rong, Ying & Yang, Liang, 2018. "Dynamic pricing for deteriorating products with menu cost," Omega, Elsevier, vol. 75(C), pages 13-26.

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