Optimal Ordering and Pricing Policies for Seasonal Products: Impacts of Demand Uncertainty and Capital Constraint

Abstract

With a stochastic price-dependent market demand, this paper investigates how demand uncertainty and capital constraint affect retailer’s integrated ordering and pricing policies towards seasonal products. The retailer with capital constraint is normalized to be with zero capital endowment while it can be financed by an external bank. The problems are studied under a low and high demand uncertainty scenario, respectively. Results show that when demand uncertainty level is relatively low, the retailer faced with demand uncertainty always sets a lower price than the riskless one, while its order quantity may be smaller or larger than the riskless retailer’s which depends on the level of market size. When adding a capital constraint, the retailer will strictly prefer a higher price but smaller quantity policy. However, in a high demand uncertainty scenario, the impacts are more intricate. The retailer faced with demand uncertainty will always order a larger quantity than the riskless one if demand uncertainty level is high enough (above a critical value), while the capital-constrained retailer is likely to set a lower price than the well-funded one when demand uncertainty level falls within a specific interval. Therefore, it can be further concluded that the impact of capital constraint on the retailer’s pricing decision can be influenced by different demand uncertainty levels.