Optimal dynamic pricing and preservation technology investment for deteriorating products with reference price effects

Abstract

Marketing and consumer behavior literature has empirically demonstrated that reference prices play a critical role in customer purchase decisions. In this paper, we propose a joint dynamic pricing and preservation technology investment model for a deteriorating inventory system with time-and-price sensitive demand and reference price effects. A generalized model is presented to jointly determine the optimal selling price, preservation technology investment and replenishment strategies that maximize the retailer's total profit over a finite planning horizon. Beginning with mild assumptions, we derive theoretical results to demonstrate the existence of an optimal solution for the deteriorating inventory problem, and reveal the sensitivities of optimal pricing and preservation technology investment decisions to an initial reference price. A simple iterative algorithm is then used to solve the proposed model by employing the theoretical results. Numerical examples and sensitivity analysis are then provided to illustrate the features of the proposed model. Finally, concluding remarks are offered.