Article ID: | iaor2016410 |
Volume: | 62 |
Issue: | 7 |
Start Page Number: | 531 |
End Page Number: | 549 |
Publication Date: | Oct 2015 |
Journal: | Naval Research Logistics (NRL) |
Authors: | Chen Wen, Fleischhacker Adam J, Katehakis Michael N |
Keywords: | marketing, programming: dynamic, inventory, simulation, supply & supply chains |
This article is concerned with the determination of pricing strategies for a firm that in each period of a finite horizon receives replenishment quantities of a single product which it sells in two markets, for example, a long‐distance market and an on‐site market. The key difference between the two markets is that the long‐distance market provides for a one period delay in demand fulfillment. In contrast, on‐site orders must be filled immediately as the customer is at the physical on‐site location. We model the demands in consecutive periods as independent random variables and their distributions depend on the item's price in accordance with two general stochastic demand functions: additive or multiplicative. The firm uses a single pool of inventory to fulfill demands from both markets. We investigate properties of the structure of the dynamic pricing strategy that maximizes the total expected discounted profit over the finite time horizon, under fixed or controlled replenishment conditions. Further, we provide conditions under which one market may be the preferred outlet to sale over the other.