Optimal piecewise-constant price under heterogeneous sensitivity to product freshness

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26 Scopus citations

Abstract

When perishable products are priced uniformly, regardless of the amount of time remaining until expiration, consumers may gravitate towards fresher products, leaving some inventory unsold. This research considers dynamic pricing policies as well as replenishment policies in the context of perishable products with a fixed shelf life. Consumers are assumed to be heterogeneous in their sensitivity to freshness, i.e. their willingness to pay more for fresher products. We develop a model for identifying an optimal (profit-maximising) dynamic pricing policy and for evaluating the extent to which both the retailer and the consumer benefit from the implementation of a dynamic pricing policy as opposed to a static policy. The model assumes that the retailer is able to utilise knowledge regarding the heterogeneous characteristics of incoming customers (e.g. the retailer can gather specific information about customers historical purchases). Unexpectedly, it is proven that in an optimal pricing policy, the retailer should assign a lower price to fresher products and then raise the price as the products approach expiration. A numerical illustration shows that profits are strongly influenced by the volatility of consumer sensitivity to freshness; specifically, this variable has the potential to reduce optimal profits by up to 8%.

Original languageEnglish
Pages (from-to)365-385
Number of pages21
JournalInternational Journal of Production Research
Volume54
Issue number2
DOIs
StatePublished - 17 Jan 2016

Bibliographical note

Publisher Copyright:
© 2014 Taylor & Francis.

Keywords

  • Dynamic price
  • EOQ
  • Heterogeneous sensitivity
  • Perishable inventory
  • Price-dependent demand
  • Time-dependent demand

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