Effects of integrating order/backorder quantity and pricing decisions

We consider a monopolistic situation where the retailer aims to find the profit-maximizing selling price, and the order and backorder quantity of an item. The price and demand are assumed to be inversely related. We develop a simple optimal approach, the proportion-balancing algorithm (PBA), which utilizes the proportions of cost components to sales revenue. We demonstrate that the PBA can handle three commonly used demand functions. However, applicability of the PBA depends on how the price–demand relationship is specified. A sensitivity analysis shows that the effects of changes in cost parameters on the order and backorder quantities can be very different from those of the classical economic order quantity model with backorders.