The Impact of Substitution and Intertemporal Demand on Coordinated Pricing-Inventory Strategies

Abstract

To coordinate pricing and inventory decision-making across time in a multi-product setting, firms must explicitly consider the impact of the price of a substitutable product in a particular period on both demand for a different product in that period (the substitution effect) and demand for that product in other periods (the intertemporal effect). We develop two demand models that explicitly consider these effects within a deterministic dynamic pricing and inventory ordering framework, and explore the impact of these effects on a firms optimal pricing and inventory ordering decisions. We analyze pricing policies under various conditions, and in a computational study we explore both the impact of differing degrees of substitution and intertemporal effects on system performance in various settings, and the importance of explicitly considering these effects when making pricing and ordering decisions.