Dynamic pricing of substitutable products with limited inventories under logit demand

This article considers the dynamic pricing of two substitutable products over a predetermined, finite selling season. The initial inventory levels of the products are fixed exogenously and there are no replenishment opportunities during the season. It is assumed that each arriving customer chooses f...

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Bibliographic Details
Published in:IIE transactions 2011-05, Vol.43 (5), p.323-331
Main Authors: Suh, Minsuk, Aydin, Goker
Format: Article
Language:English
Subjects:
consumer choice
Demand
dynamic pricing
Dynamics
Inventories
inventory
Inventory management
Optimization
Optimization techniques
Pricing
Pricing policies
Product choice
Raw materials
Replenishment
Seasons
Stockpiling
Studies
substitutable products
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Summary:This article considers the dynamic pricing of two substitutable products over a predetermined, finite selling season. The initial inventory levels of the products are fixed exogenously and there are no replenishment opportunities during the season. It is assumed that each arriving customer chooses from available products based on the multinomial logit choice model, which captures the effect of prices on consumer choice. Every time a product runs out of stock, the set of choices shrinks, capturing the effect of stockouts on consumer choice. It is shown that, under the optimal pricing policy, the marginal value of an item is increasing in the remaining time and decreasing in its own stock level and the other product's stock level. Despite such non-surprising behavior on the part of marginal values, the optimal price itself is not simply monotonic in the remaining time or the other product's stock level. For example, a product's optimal price may increase if the remaining time decreases or if the total inventory grows. It is shown that such optimal behavior can be understood through alternative gauges such as the optimal price difference between the two products and the optimal purchase probabilities.
ISSN:0740-817X
2472-5854
1545-8830
2472-5862
DOI:10.1080/0740817X.2010.521803