On the benefit of inventory-based dynamic pricing strategies

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

29 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)249-260
Journal / PublicationProduction and Operations Management
Volume19
Issue number3
Publication statusPublished - May 2010
Externally publishedYes

Abstract

We study the optimal pricing and replenishment decisions in an inventory system with a price-sensitive demand, focusing on the benefit of the inventory-based dynamic pricing strategy. We find that demand variability impacts the benefit of dynamic pricing not only through the magnitude of the variability but also through its functional form (e.g., whether it is additive, multiplicative, or others). We provide an approach to quantify the profit improvement of dynamic pricing over static pricing without having to solve the dynamic pricing problem. We also demonstrate that dynamic pricing is most effective when it is jointly optimized with inventory replenishment decisions, and that its advantage can be mostly realized by using one or two price changes over a replenishment cycle. © 2009 Production and Operations Management Society.

Research Area(s)

  • Brownian demand model, Demand variability, Dynamic pricing, Joint inventory and pricing decisions