Optimal Pricing and Replenishment of an Expiring Inventoried Product under Heterogeneous Consumer Sensitivities

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Abstract

Efficient pricing and replenishment decisions have the potential to yield significant increase in revenues. A widespread assumption in existing models of expiring inventories is that consumers are homogeneous in their sensitivities towards the factors that influence demand. Yet, there are numerous scenarios in which consumers may vary in terms of their sensitivities. In addition, most of the current literature addresses expiring inventories for which the perceived quality deteriorates over time, while models of perishables for which the quality remains stable over time (e.g., electronic devices) or increases (e.g., green bananas, or wine) have rarely been suggested. We analyze a joint pricing and replenishment optimization model that aims to maximize the retailer's profit and is general enough to consider these three types of expiring inventories, as well as heterogeneity in consumer sensitivities. In particular, our model considers the effects of remaining shelf-life, price and perceived quality on demand. We obtain the optimal price given any cycle length and derive the FOC (first order condition) for obtaining the optimal cycle length. By numerical study, we show that the seller might gain significant profits in cases where consumers are highly heterogeneous either in their sensitivity to price or in their sensitivity to perceived quality. In contrast, the results indicate that the seller might lose significant profits (up to 16%) when consumers are highly heterogeneous in their sensitivity to expiration. Unexpectedly, the optimal price consumers pay is, in general, only moderately affected by the heterogeneity in consumer sensitivity.

Original languageEnglish
Pages (from-to)522-552
Number of pages31
JournalDecision Sciences
Volume49
Issue number3
DOIs
StatePublished - Jun 2018

Bibliographical note

Publisher Copyright:
© 2017 Decision Sciences Institute

Keywords

  • Heterogeneous Demand
  • Perceived Quality
  • Price Sensitivity
  • Pricing Policy
  • Shelf-Life Sensitivity

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