Joint Strategy of Dynamic Ordering and Pricing for Competing Perishables with Q‐Learning Algorithm

Abstract

We use Machine Learning (ML) to study firms’ joint pricing and ordering decisions for perishables in a dynamic loop. The research assumption is as follows: at the beginning of each period, the retailer prices both the new and old products and determines how many new products to order, while at the end of each period, the retailer decides how much remaining inventory should be carried over to the next period. The objective is to determine a joint pricing, ordering, and disposal strategy to maximize the total expected discounted profit. We establish a decision model based on Markov processes and use the Q‐learning algorithm to obtain a near‐optimal policy. From numerical analysis, we find that (i) the optimal number of old products carried over to the next period depends on the upper quantitative bound for old inventory; (ii) the optimal prices for new products are positively related to potential demand but negatively related to the decay rate, while the optimal prices for old products have a positive relationship with both; and (iii) ordering decisions are unrelated to the quantity of old products. When the decay rate is low or the variable ordering cost is high, the optimal orders exhibit a trapezoidal decline as the quantity of new products increases.