Abstract

ABSTRACTIn this article, we consider an infinite horizon, continuous-review, stochastic inventory system in which the cumulative customers’ demand is price dependent and is modeled as a Brownian motion. Excess demand is backlogged. The revenue is earned by selling products and the costs are incurred by holding/shortage and ordering; the latter consists of a fixed cost and a proportional cost. Our objective is to simultaneously determine a pricing strategy and an inventory control strategy to maximize the expected long-run average profit. Specifically, the pricing strategy provides the price pt for any time t ⩾ 0 and the inventory control strategy characterizes when and how much we need to order. We show that an (s*, S*, p*) policy is optimal and obtain the equations of optimal policy parameters, where p* = {p*t: t ⩾ 0}. Furthermore, we find that at each time t, the optimal price p*t depends on the current inventory level z, and it is increasing in [s*, z*] and decreasing in [z*, ∞), where z* is a negative level.

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