Optimal pricing and donation policy for fresh goods

Abstract

This paper studies a socially responsible food-retailer’s operational planning problem for a continuously deteriorating inventory over two periods with the consideration of donation and quality-sensitive customers. Each year, millions of tonnes of food are wasted causing economic, environmental, and social misfortunes, while at the same time millions are undernourished. Besides expired items, edible foods are often deliberately disposed of to attract quality-sensitive consumers. We address this issue by presenting an optimization model that incorporates a retailer’s corporate social responsibility act, in the form of charitable donations, and makes use of the internet of things (IoT)-enabled condition tracking technologies to accurately estimate the effective (true) quality of the goods and its impacts on consumer demand. We formulate a quality-dependent newsvendor problem (QDNP) to determine the stocking quantity and the regular price of the goods at the beginning of the selling season, and the second-period price and donation policy at the end of the first period. The optimal donation policy at the end of the first period depends on the quality (time to expiration), on-hand inventory, and donation reward. Moreover, for a given inventory level, expected food waste is always greater in the absence of donations. QDNP outperforms the no-donation model, particularly when the uncertainty is high and/or the length of the second period is short. Interestingly, the two models react to an increase in uncertainty oppositely: QDNP orders more to alleviate future shortages, whereas, no-donation policy orders less to avoid future disposal costs at the end of the selling season.