Single-period ordering and pricing policies with markdown, multivariate demand and customer price sensitivity

Abstract

Abstract This paper studies single-period ordering and markdown pricing policies for short lifecycle products (SLP) by considering differing customer price and time sensitivities. The SLP is assumed to have declining customer valuation (and price) over the selling season and multivariate demand, which is a function of the inventory level, price and time. Promotional markdown (in contrast to clearance markdown) becomes an indispensable part of a pricing policy in view of stock-dependent demand and isused as a mechanism for customer segmentation and price discrimination over time. To offer a realistic pricing, we consider the impact of highly price-sensitive customers who value the price of the product over its innovativeness and who act strategically by purchasing only during a‘sale’ at a markdown price. In this context, single-period inventory models are formulated to include markdown under two market scenarios, namely the homogenous market and thetwo-segment market – a price insensitive (PI) segment, and a price-sensitive (PS) segment. The assumption of non-overlapping segments is relaxed later, and PI customers are allowed to buy later on at a markdown price. The proposed profit-maximising models determine the optimal order size, initial price, markdown time, and price. The solution methods along with the optimality conditions are specified in detail. The results are discussed by using numerical examples, and model behavior with respect to parameters is presented along with the sensitivity analysis.The study reveals the benefits of market segmentation and markdown pricing which recognise high price-sensitive ‘bargain hunter’ customers and offers deeper discounts that yield greater profits. It also demonstrates the superiority of a markdown policy to a single pricing policy, and the benefits of considering the demand stimulating-effect of inventory.