Simultaneous pricing and inventory management of deteriorating perishable products

Abstract

This study addresses the problem of combined pricing and inventory control in the context of perishable goods—specifically, when demand is uncertain and price-sensitive and the consumers are free to choose between new and old units, based on the relative affordability of prices. First, the problem is formulated as a periodic review problem for a product with finite arbitrary lifetime and a myopic policy, which is often followed in practice, is discussed. Analytically it is shown that the solution obtained by the policy is also the unique solution that maximizes the individual profits from the inventories at each age. Next, this study addresses a special case—that of products with two-period lifetime, which is a scenario of practical importance. It is proven that under the policy of discounts and sticky pricing, which is often practiced in the brick-and-mortar retail stores, the myopic policy is in fact the steady-state optimal policy of the infinite-horizon problem. The study concludes with a numerical example and directions for future research in the area of joint pricing and inventory management of deteriorating, perishable products.