Abstract
This paper considers a single-item joint pricing and inventory replenishment problem under reference price effects in consecutive T periods. Demands in consecutive periods are sensitive to price and reference price with general demand distribution. At the end of each period, after the demand realization, a firm can return excess stocks to a supplier or place an expediting order to reduce the loss by shortage. Unfilled demands are fully backlogged. In order to maximize the total expected discounted profit with reference price effects the optimal pricing and inventory replenishment policies for regular order and the inventory adjustment decisions for returning/expediting are derived. The optimal replenishment policy for regular order is a base-stock policy, the optimal pricing policy is a base-stock-list-price policy, and the optimal policy for returning/expediting inventory adjustment follows a dual-threshold policy. Furthermore, the analysis of the operational impacts (from the perspective of adding returning/expediting and reference price effects, respectively) is researched. Numerical results also show that considering both returning/expediting and reference price effects is more profitable than considering only one of them.
Highlights
Reference price, as the cognitive price of customers, is formed through the customers’ repeated purchasing experiences
This paper considers a single-item joint pricing and inventory replenishment problem under reference price effects in consecutive T periods
To answer these research questions, this paper develops a dynamic programming model to find the optimal dynamic policies that determine the pricing and inventory replenishment for regular order and inventory adjustment decisions for returning/expediting adjustment under reference price effects in each period so that the total expected discounted profit is maximized
Summary
As the cognitive price of customers, is formed through the customers’ repeated purchasing experiences. We study the joint decision problem on determining pricing and inventory control strategies with returns and expediting under reference price effects. When introducing returning/expediting decisions, the following technical problems will arise: (1) whether the supermodularity of the value function can be guaranteed when the decision variable of returning/expediting is added; (2) whether the regular replenishment strategy established in previous literature, such as Guler et al [14, 15] and Chen et al [17], is still the basestock policy; (3) how the reference price impacts the returning/expediting decision making; (4) do firms benefit from the simultaneous consideration of returning/expediting and reference price. To answer these research questions, this paper develops a dynamic programming model to find the optimal dynamic policies that determine the pricing and inventory replenishment for regular order and inventory adjustment decisions for returning/expediting adjustment under reference price effects in each period so that the total expected discounted profit is maximized.
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