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Dynamic Pricing and Ordering Decisions by a Monopolist

Author

Listed:
  • Arvind Rajan

    (Operations Research Department, AT&T Bell Laboratories, Holmdel, New Jersey 07733)

  • Richard Rakesh

    (Department of Mathematical Sciences, University of Delaware, Newark, Delaware 19716 Steinberg
    Service Concept and Business Analysis Department, AT&T Bell Laboratories, Murray Hill, New Jersey 07974)

Abstract

This paper considers the relationship between pricing and ordering decisions for a monopolistic retailer facing a known demand function where, over the inventory cycle, the product may exhibit: (i) physical decay or deterioration of inventory called wastage; and (ii) decrease in market value called value drop associated with each unit of inventory on hand. The retailer is allowed to continuously vary the selling price of the product over the cycle. We introduce a notion of instantaneous margin, and use it to derive profit maximizing conditions for the retailer. The model explains the markdown of retail goods subject to decay. It also provides guidance in determining when price changes during the cycle are worthwhile due to product aging, how often such changes should be made, and how such changes affect ordering intervals and quantities.

Suggested Citation

  • Arvind Rajan & Richard Rakesh, 1992. "Dynamic Pricing and Ordering Decisions by a Monopolist," Management Science, INFORMS, vol. 38(2), pages 240-262, February.
    • Handle: RePEc:inm:ormnsc:v:38:y:1992:i:2:p:240-262
    DOI: 10.1287/mnsc.38.2.240
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