Joint pricing and ordering policies for deteriorating item with retail price-dependent demand in response to announced supply price increase

Abstract

Recently, due to rapid economic development in emerging nations,the world's raw material prices have been rising. In today'sunrestricted information environment, suppliers typically announceimpending supply price increases at specific times. This allowsretailers to replenish their stock at the present price, beforethe price increase takes effect. The supplier, however, willgenerally offer only limited quantities prior to the priceincrease, so as to avoid excessive orders. The retail price willusually reflect any supply price increases, as market demand isdependent on retail price. This paper considers deterioratingitems and investigates (1) the possible effects of a supply priceincrease on retail pricing, and (2) ordering policies under theconditions that special order quantities are limited and demand isdependent on retail price. The purpose of this paper is todetermine the optimal special order quantity and retail price tomaximize profit. Our theoretical analysis examines the necessaryand sufficient conditions for an optimal solution, and analgorithm is established to obtain the optimal solution.Furthermore, several numerical examples are given to illustratethe developed model and the solution procedure. Finally, asensitivity analysis is conducted on the optimal solutions withrespect to major parameters.