Optimal Pricing Strategies for an Inventory System with Perishable Items and Waiting Time Dependent Order Cancellations

Abstract

Although many researchers have studied inventory models for perishable items, the situation of advance sales, spot sales and order cancellations have not been addressed so far. However, this problem arises in a variety of industries including the sales of fashion garments, flight seats and hotel rooms. In this article, we deal with an inventory system in which sales cycle is divided into an advance sales period and a spot sales period. We consider order cancellation effect which depends on the waiting time of the customer orders. The goal is to determine the optimal order quantity and optimal prices in order to maximize the profit. We also show the concavity of the profit function using mathematical lemmas and theorem. Besides we develop a solution procedure which computes optimal policy effectively. Finally we present the results of numerical study for linear and exponential demand functions.