An Ordering and Pricing Policy for a Periodic Review Inventory Model with Declining Demand

Abstract

Past research in the area of inventory modeling has yielded a variety of inventory models that suit several situations. Yet there is a scope as well as a need to make a model more general and more flexible. In this paper, we develop an ordering cum pricing policy for a periodic review inventory system in which the demand is declining with time, and depends on the selling price, in terms of the price elasticity of demand. Such a situation is commonly observed for instance, in case of fashion goods. We study the model in the case of non-deteriorating as well as deteriorating items. A strategy that is commonly employed by dealers of such goods is to reduce the price to encourage customers to buy the product. We incorporate this strategy in the model, that is, we lower the price to an optimal level, at a given point in every review period. The resulting improvement in profits is observed through a profit comparison with the corresponding model that does not allow price reduction. We also derive the model where price reduction is implemented after observing the intermediate inventory level, and make a profit comparison.