Dynamic Pricing for Multiple Class Deterministic Demand Fufillment

Publication Type

Journal Article

Publication Date

2007

Abstract

We consider how a firm should allocate inventory to multiple customer classes that differ based on the price they pay and their willingness to incur delay in fulfillment of their demand. The problem is set in a deterministic demand, economic-order-quantity-like environment with holding, backorder, lost demand and setup costs. The firm either fulfills demand or offers a price discount to induce the demand to wait for fulfillment from the next reorder. We determine the optimal policy and discuss how changes in various parameters affect profitability, customer service, and operational measures such as order frequency and base stock levels. We compare the results to a policy that only rations inventory without dynamic discounting and to a policy that only provides discounts. Through the comparison, we observe that dynamic pricing can be seen as a combination of a pricing mechanism which determines demand and an allocation mechanism that differentiates between customer classes, serving each ones needs. We show that if lower-value customers are distinguished by accepting reduced service, it is possible that both high and low-value customer classes see better levels of service under the optimal policy than under a discounting only policy. In addition we demonstrate the applicability of the results to a stochastic version of the problem

Keywords

Inventory allocation, discounting, multiple class, economic order quantity

Discipline

Business Administration, Management, and Operations

Research Areas

Finance

Publication

IIE Transactions

Volume

39

Issue

11

First Page

997

Last Page

1013

ISSN

0740-817X

Identifier

10.1080/07408170601091881

Publisher

IIE

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