Optimal dynamic pricing for deteriorating items with reference price effects when inventories stimulate demand

Abstract

In this paper, we incorporate reference price effects into a deteriorating inventory problem when the demand rate depends on displayed stock level and selling price simultaneously. Reference price effects are formed empirically by customers to adjust current price perception on the basis of past purchases. The market demand is assumed to be responsive to the difference between the current selling price and the reference price, which is perceived as a loss or a gain. We consider three scenarios of market demand: loss neutrality, loss aversion, and loss seeking. An optimal dynamic pricing model is established to determine a pricing strategy maximizing the discounted total profit over an infinite time horizon. Theoretical results are derived to demonstrate the existence of the optimal solutions and to explore the relationships between optimal pricing decisions and an initial reference price based on mild assumptions. Numerical example and sensitivity analysis are presented to illustrate the theoretical results and managerial insights. Finally, concluding remarks are offered.