Joint pricing and inventory decisions under resource constraints and price-based substitution

Abstract

In this article, we consider a joint pricing-inventory decision problem for horizontally differentiable products that require common resources to produce, procure or hold. The total availabilities of the resources are exogenously fixed. Demands for the products are stochastic, price-based substitutable and lost if unmet. For the case where two products share one resource, we prove the existence of a unique optimal solution to the decision problem. We also characterize the firm's assortment under the optimal solution and identify a distribution-free product index to determine the assortment priority among the products. Furthermore, we present some results regarding the monotonicities of the optimal pricing-inventory policy.

Yield Management Models for Two Substitutable Products

“…Kocabiykoglu and Popescu [13], Kim [11], Lus and Muriel [15], Tang and Yin [22] and Yu [26]. Lee and Kim [7] developed an optimal pricing and production decision model with price-driven substitution alone, where a part of the demand lost in one market moves to the other market.…”

“…They considered pricedriven substitution alone. Yu [26] studied joint pricing and inventory decisions with pricedriven substitution for two substitutable products, where there was a resource constraint for the two market segments.…”