Welfare Implications of Inventory-Driven Dynamic Pricing

Abstract

We argue that dynamic pricing motivated by the management of inventory holding and ordering costs leads to increased operational efficiencies that could benefit firms without hurting consumers. To demonstrate this point, we equip the traditional economic order quantity (EOQ) setting with a rich set of demand models and compare social outcomes under two alternatives, dynamic and static pricing. We show that dynamic pricing generates higher retailer profits, a lower average price per unit sold, and higher sales volumes than static pricing. The mechanism behind the result is that with dynamic pricing the retailer ties the price of each unit to its holding costs, which allows him to increase the order quantity compared with static pricing and thus save on fixed ordering costs. Some of these cost savings are passed to consumers. Moreover, we demonstrate that this mechanism is robust to the presence of price-anticipating (strategic) consumer behavior. This paper was accepted by Serguei Netessine, operations management.

Dynamic Pricing and Information Disclosure for Fresh Produce: An Artificial Intelligence Approach

“…In line with Stamatopoulos et al. (2019), we consider that a lower average price per unit sold 11 implies a higher rate of consumer surplus. We show that Model 1 has a lower average price per unit sold than the benchmark model across the three cases (Table 6).…”

“…Finally, quality-based dynamic pricing and information disclosure improve the retailer's profits, but they impose different welfare implications for customers. In line with Stamatopoulos et al (2019), we consider that a lower average price per unit sold 11 implies a higher rate of consumer surplus. We show that Model 1 has a lower average price per unit sold than the benchmark model across the three cases (Table 6).…”

Peak-Hour Pricing Under Negative Externality: Impact of Customer Flexibility and Competitive Asymmetry

“…Various research studies on dynamic pricing are intended to manage demand when the supply is fixed (Gallego and van Ryzin 1994, Petruzzi and Dada 1999, Stamatopoulos et al 2019, learn about demand (Araman andCaldentey 2009, Besbes andZeevi 2009), or stimulate demand for new products (Huang et al 2018). Eliashberg and Jeuland (1986) study the dynamic pricing using a duopoly model to study the context of competitive entry decision.…”

Should price cannibalization be avoided or embraced? A multimethod investigation

“…In other words, they take the capacity as the focal variable to manage the demand. Varying prices are often considered the most natural mechanism for responding to market fluctuations and uncertainty in demand (see for instance, Aviv & Pazgal, 2005; Aydin & Ziya, 2009; Chen & Gallego, 2019; De Vericourt & Lobo, 2009; den Boer, 2015; Feng et al., 2020; Gallego & Hu, 2014; Li & Srinivasan, 2019; Stamatopoulos et al., 2019; Sun et al., 2015; Talluri & Van Ryzin, 2006, p. 176). This paper focuses on overlapping price ranges, rather than capacity controls, to effectively manage the demand.…”