Integrating dynamic pricing and inventory control for fresh‐agri product under consumer choice

Abstract

In this article, we investigate a joint pricing and inventory problem for a retailer selling fresh‐agri products (FAPs) with two‐period shelf lifetime in a dynamic stochastic setting, where new and old FAPs are on sale simultaneously. At the beginning of each period, the retailer makes ordering decision for new FAP and sets regular and discount prices for new and old inventories, respectively. After demand realisation, the expired leftover is disposed and unexpired inventory is carried to the next period, for continuing selling. Unmet demand of all FAPs is backordered. The objective is to maximise the total expected discount profit over the whole planning horizon. We present a price dependent, stochastic dynamic programming model taking into account zero lead‐time, linear ordering costs, inventory holding and backlogging costs, as well as disposal cost. As the influence of the perishability, each customer selects his preferred choice based on the utility of product price and quality. By the way of constructing demand rate vector, the original formulation can be transferred to be jointly concave and tractable. Finally, we characterise the optimal policy and develop effective methods to solve the problem. We also conduct numerical studies to further characterise the optimal policy, and to evaluate the loss of efficiency under static policies when compared to the optimal dynamic policy.