Optimal ordering and pricing policies in managing perishable products with quality deterioration

Abstract

We consider a monopoly grocery retailer that procures from a far away supplier a batch of a perishable product. A random part of this batch has quality deterioration before entering the market during a long-distance transportation. With the stochastic freshness-keeping ratio, i.e. the ratio of products preserved in high quality after transportation, the grocery retailer has to determine its ordering batch size and selling prices to alleviate cannibalisation caused by quality segmentation. We find that when the realised size of the high-quality product exceeds half of the maximum market potential after the transportation, it is optimal to sell high-quality products only to avoid cannibalisation. Otherwise, it is optimal to sell the high-quality and low-quality products simultaneously to extend sales. We also find that, when more customers arrive or the difference of two quality levels becomes larger, it is optimal to order more to gain more profit. Finally, we investigate the role of freshness-keeping effort on the optimal pricing and ordering policy and further characterise the optimal freshness-keeping effort under various structures of the freshness-keeping cost.