A Few Issues in Pricing and Risk in Supply Chain

Abstract

Pricing and risk management are crucial determinants of successful business operations across all industries. In this thesis, we consider several issues related to pricing and risks in supply chain management.

In the first section, we investigate the pricing problem in the context of customer Mental Accounting and Reference Price Adaptation (MARA), which provides a micro-foundation for explaining various trading anomalies observed in practice. How a seller can exploit mental accounting and preference price adaptation by setting prices dynamically to maximize revenue remains unexplored in the existing literature. In this paper, we build a continuous-time dynamic game to investigate the equilibrium pricing strategies under the mental accounting and reference price adaptation model with two reference price adaptations, i.e., the recent weighting and the primary recency. We fully characterize the equilibrium price path and the reference price path and reveal that the optimality of the first anchoring/promotion and then penetration pricing strategy results from the irrationality of consumers -- the mental accounting. If consumers are rational, then a pure penetration pricing strategy is optimal. Even more interestingly, if consumers are heterogeneous, obtaining high or low utility from purchasing and consumption, a sudden price cut down may occur when penetration pricing is applied. In addition to identifying the optimal pricing strategies, we also analyze the market positioning decision for the seller.

Then, we study the robust multi-product pricing problem under a general utility-based discrete choice model. In the robust version, the seller is ambiguity-averse and only knows that the true customer utility distribution is in the neighborhood of a given distribution. We show that an ambiguity-averse seller overestimates the purchasing probability of products with small profit margins and underestimates the purchasing probability of products with more significant profit margins compared with an ambiguity-neutral seller, leading to lower prices. Furthermore, we consider a multinomial logit (MNL) model as a reference distribution with product-differentiated price sensitivities. We provide an explicit solution for optimal prices, and our results recover the classical constant markup property. We also consider a generalized extreme value(GEV) model as a reference distribution with constant price sensitivities. Similarly, we show that the adjusted markup is constant over all products.

In the final section, the financial risk involves in the inventory problem. We delve into the inventory problem by examining the behavior of the widely accepted Sharpe ratio in the newsboy problem, considering general demand functions. Our results indicate that the Sharpe ratio decreases with respect to the order quantity when investing in one product, assuming a nonnegative return rate. For the multi-product newsvendor problem, we also demonstrate that the marginal Sharpe ratio first increases and then decreases with the inventory level of a new product, provided its demand is independent of other products. Moreover, we investigate the effects of price-sensitivities and demand correlations. This research enriches our understanding of risk in inventory management and bridges the gap between financial and operational activities in the literature.

Date of Award	18 Sept 2023
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Houmin YAN (Supervisor) & Yimin YU (Co-supervisor)