Joint Dynamic Pricing of Multiple Perishable Products Under Consumer Choice

Abstract

In response to competitive pressures, firms are increasingly adopting revenue management opportunities afforded by advances in information and communication technologies. Motivated by these revenue management initiatives in industry, we consider a dynamic pricing problem facing a firm that sells given initial inventories of multiple substitutable and perishable products over a finite selling horizon. Because the products are substitutable, individual product demands are linked through consumer choice processes. Hence, the seller must formulate a joint dynamic pricing strategy while explicitly incorporating consumer behavior. For an integrative model of consumer choice based on linear random consumer utilities, we model this multiproduct dynamic pricing problem as a stochastic dynamic program and analyze its optimal prices. The consumer choice model allows us to capture the linkage between product differentiation and consumer choice, and readily specializes to the cases of vertically and horizontally differentiated assortments. When products are vertically differentiated, our results show monotonicity properties (with respect to quality, inventory, and time) of the optimal prices and reveal that the optimal price of a product depends on higher quality product inventories only through their aggregate inventory rather than individual availabilities. Furthermore, we show that the price of a product can be decomposed into the price of its adjacent lower quality product and a markup over this price, with the markup depending solely on the aggregate inventory. We exploit these properties to develop a polynomial-time, exact algorithm for determining the optimal prices and the profit. For a horizontally differentiated assortment, we show that the profit function is unimodal in prices. We also show that individual, rather than aggregate, product inventory availability drives pricing. However, we find that monotonicity properties observed in vertically differentiated assortments do not hold.dynamic pricing, revenue management, perishable products, consumer choice, vertical and horizontal product assortments, efficient algorithm

Pricing When Customers Have Limited Attention

“…This is the standard MNL equation we provided in (7) with v = q i − p. It can be shown that the optimal price under MNL is p mnl i = λ 1 + W(e q i /λ−1 ) for i ∈ {H, L}, where W is the Lambert function (see Akcay et al 2010). Note that customers being invariant to q i − p means they do not distinguish their choices before acquiring information, regardless of quality or price.…”

Ordering and Pricing Strategies for Fresh Products with Multiple Quality Levels Considering Consumer Utility

“…This is also a model involving quality drop and quantity change. Akcay et al (2010) considered a dynamic pricing problem facing a firm that sells given initial inventories of multiple substitutable and perishable products over a finite selling horizon. They modeled this multiproduct dynamic pricing problem as a stochastic dynamic program and analyzed its optimal prices [10].…”

“…Akcay et al (2010) considered a dynamic pricing problem facing a firm that sells given initial inventories of multiple substitutable and perishable products over a finite selling horizon. They modeled this multiproduct dynamic pricing problem as a stochastic dynamic program and analyzed its optimal prices [10]. Li et al (2012) studied the joint pricing and inventory control problem for perishables when a retailer does not sell new and old inventory at the same time [11].…”

Economic Order Quality Model for Determining the Sales Prices of Fresh Goods at Various Points in Time

“…The assumption of the traditional EOQ model has been relaxed from "sales prices are a given constant (fixed demand rate)" to "sales prices are a decision variable for dealers" [25,38,50,[57][58][59][60][61][62][63][64][65][66][67][68][69][70][71][72][73].…”