Optimal pricing/ordering and advertising investment strategies for a capital-constrained retailer

Abstract

Abstract This paper studies a stylized two-period model with a capital-constrained retailer who attempts to achieve its short-term survival and long-term profitability by implementing the associated marketing/operational strategy. Given the demand information, we analyze the problem for three scenarios: (1) basic model; (2) competition; and (3) uncertain advertising effectiveness. The results suggest that the retailer should place the retail price and order quantity at the monopoly level, and adopt the “invest-all-or-none” advertising investment strategy for different market situations. When the market demand is stochastic, however, the optimal policies obtained in deterministic demand case may fail. Alternatively, we propose two operational strategies, i.e., low-risk strategy and high-risk strategy, to balance the pricing, ordering and advertising investment decisions through an appropriate manner. We numerically investigate the impacts of market parameters on the optimal decisions under demand uncertainty, and show that many results obtained in deterministic demand case continue to hold and present some other interesting observations. Finally, we extend our model to consider the independent exclusive advertising effect with competition, the saturation effect of advertising investment, and the multi-period case.