Article ID: | iaor20042629 |
Country: | Netherlands |
Volume: | 147 |
Issue: | 3 |
Start Page Number: | 530 |
End Page Number: | 548 |
Publication Date: | Jun 2003 |
Journal: | European Journal of Operational Research |
Authors: | Lau Hon-Shiang, Lau Amy Hing Ling |
Keywords: | inventory |
When a price–demand relationship is needed in inventory/pricing models, very often a convenient (typically linear) function is arbitrarily chosen. The common-wisdom implication is that any downward-sloping demand curve would lead to similar conclusions. This paper applies different demand-curve functions to a simple inventory/pricing model, and shows that while the common-wisdom implication is valid for a single-echelon system, assuming different demand-curve functions can lead to very different results in a multi-echelon system. In some situations, a very small change in the demand-curve appearance leads to very large changes in the model's optimal solutions. Other significant but counter-intuitive effects of the demand-curve form are also revealed. This paper does not completely resolve the difficulties revealed by the counter-intuitive effects reported here, but establishing the existence of these effects represents a first step towards developing procedures to handle such effects; these procedures will be necessary to ensure the reliability of many multi-echelon models for products having price-sensitive demands.