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Simulation study of the price differentiation effect in a stochastic deteriorating inventory with heterogeneous consumers – freshness sensitivity

Author

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  • Avi Herbon
  • Uriel Spiegel
  • Joseph Templeman

Abstract

A fixed price policy regardless of expiration date may result in unsold inventory and sales loss. Price reduction over time as the expiration date approaches motivates customers to purchase all items, including the ones that are left with only a short interval until their expiration. We conduct a discrete event simulation that captures the main characteristics of this phenomenon. Results show that a moderate differentiation of price increases profits by 6%, a larger differentiation reduces profits. Profits are the highest for freshness-oriented customers. A fixed price policy is preferred in an environment of large variance and expected near term expirations.

Suggested Citation

  • Avi Herbon & Uriel Spiegel & Joseph Templeman, 2012. "Simulation study of the price differentiation effect in a stochastic deteriorating inventory with heterogeneous consumers – freshness sensitivity," Applied Economics, Taylor & Francis Journals, vol. 44(24), pages 3101-3119, August.
    • Handle: RePEc:taf:applec:v:44:y:2012:i:24:p:3101-3119
    DOI: 10.1080/00036846.2011.570718
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    Cited by:

    1. Jing Lu & Jianxiong Zhang & Fuxiao Lu & Wansheng Tang, 2020. "Optimal pricing on an age-specific inventory system for perishable items," Operational Research, Springer, vol. 20(2), pages 605-625, June.
    2. Avinadav, Tal & Herbon, Avi & Spiegel, Uriel, 2013. "Optimal inventory policy for a perishable item with demand function sensitive to price and time," International Journal of Production Economics, Elsevier, vol. 144(2), pages 497-506.
    3. Herbon, Avi & Levner, Eugene & Cheng, T.C.E., 2014. "Perishable inventory management with dynamic pricing using time–temperature indicators linked to automatic detecting devices," International Journal of Production Economics, Elsevier, vol. 147(PC), pages 605-613.
    4. Andrew J. Buck & Tavor Tchai & Uriel Spiegel & Wayne A. Morra, 2017. "Refrigeration and the Reduction of the Takeoff Rate of Bushmeat," SAGE Open, , vol. 7(1), pages 21582440166, January.

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