Inventory policy based on differential pricing with stockout compensation in B2C E-commerce

Abstract

Differential pricing is an effective tool for electronic retailer to manage the inventory and mitigate customer's dissatisfaction caused by stockout. The paper analyzes the effect of offering a lower price during stockout period to compensate for a customer's waiting time and simultaneously optimizes the ordering quantity of inventory, the length of out-of-stock period and the prices offered during the in-stock and stockout periods, using the similar analysis framework with Bhargava and Sun's model. However, our model is different from the Bhargava and Sun's model in two ways. Firstly, the order quantity of inventory replaces the duration of in-stock as decision variable because using a random variable as decision objective is not appropriate. Secondly, a customer's valuing of the item during out-of-stock period should be different from that in in-stock period due to customer's reactions to the stockout. The paper analyzes the characteristics of optimal inventory, pricing and stockout period. The optimal stockout-compensation policy is to make the two periods have equal effective prices. We introduce the concept of acceptance rate thetas, explores its effect on inventory and pricing policy. The firm obtains maximum profits only when the customer's valuation for the product in the stockout period is the same as that in the in-stock period. We analyze the behaviors of rational customer and find that the rational consumers never defer their purchase whether they arrive in the in-stock period or not. Thus, the optimal inventory and pricing policy is unchanged for the rational customers. The paper points out existence conditions of the unique optimal solution, especially gives the optimal inventory and pricing policy when G(U) is a uniform distribution.