Comments on: A comparative analysis for determining optimal price and order quantity when a sale increases demand

Abstract

Although the net present value (NPV) criterion is theoretically the correct approach to developing optimal inventory policies, in the classical EOQ case, the average profit criterion generates solutions that are practically identical to those resulting from the NPV criterion. Nevertheless, a recent paper suggests that, when the demand for a product is price-elastic and a wholesaler offers a one-time-only price discount, use of the average profit criterion may obtain policies that are drastically suboptimal compared to the policies obtained by using the NPV criterion. We show that this suggestion is based on inaccurate models and inconsistent comparisons. Although in cases of large one-time-only discounts, there may be significant differences in the policies and consequences resulting from the two criteria, such large discounts are unrealistic. Furthermore, the larger the discount, the less practicable are the optimal order quantities based on either one of these criteria. Thus, in most real-life situations, the use of the average profit criterion does not result in serious suboptimization. In these situations, what may be important is not whether a retailer uses the NPV criterion or the average profit criterion, but whether the retailer can and does implement the optimal decisions resulting from the use of either criterion.