Single‐Versus Two‐Opportunity Price Postponement and Ordering Strategies of a Seasonal Product

Abstract

ABSTRACTWe compare two strategies of ordering and pricing postponement for a seasonal product. In the single‐opportunity strategy, the retailer orders all base‐stock prior to the beginning of the season and sets the price when the season begins and demand information becomes available. In the two‐opportunity strategy, the retailer orders only some of her stock before the season, and places an additional order after the season starts; the second‐order quantity and the prices for each quantity of base‐stock are determined according to currently available demand information. The latter strategy can accommodate unexpected demand changes that occur late in the selling season. We provide sufficient conditions in which the two‐opportunity strategy is preferable to the single‐opportunity strategy. Each problem is analyzed using a multistage programming approach, and optimal prices as well as optimality conditions for the different base‐stock levels are obtained. In contrast to previous studies, our model addresses the effect of the timing of the arrival of the second order and accounts for holding costs over time as well as a reputation penalty associated with lost sales. Moreover, it does not ignore fixed costs associated with order placement and processing of demand information. A numerical example and sensitivity analysis of the key parameters show that the ratio between the optimal expected profits obtained under the single‐opportunity strategy and under the two‐opportunity strategy is lower for higher values of the holding costs or reputation penalty. Moreover, the ratio is higher for later splitting points as well as for higher fixed costs.