Dynamic stochastic inventory management with reference price effects

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

25 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)1529-1536
Journal / PublicationOperations Research
Volume64
Issue number6
Early online date13 Oct 2016
Publication statusPublished - Nov 2016

Abstract

We analyze the joint inventory and pricing decisions of a firm when demand depends on not only the current selling price but also a memory-based reference price and customers are loss averse. The presence of reference price effect leads to a nonconcave one-period expected revenue in price and reference price. We introduce a transformation technique that allows us to prove under some mild assumptions the optimality of a reference-price-dependent base-stock list-price policy, which is characterized by a base-stock level and a target reference price. In addition, we show that the target reference price is increasing in the reference price, but except in the loss-neutral case, the base-stock level is not monotone in the reference price. We also show that in the steady state of the model with the reference price effect, the optimal price is lower while the optimal base-stock level is higher than their counterparts in the model without the reference price effect.

Research Area(s)

  • Base-stock list-price policy, Dynamic pricing, Loss averse, Reference price effects, Stochastic inventory

Citation Format(s)

Dynamic stochastic inventory management with reference price effects. / Chen, Xin; Hu, Peng; Shum, Stephen; Zhang, Yuhan.

In: Operations Research, Vol. 64, No. 6, 11.2016, p. 1529-1536.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review