Joint Inventory and Pricing Coordination with Incomplete Demand Information

Joint Inventory and Pricing Coordination with Incomplete Demand Information

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Article ID: iaor20161523
Volume: 25
Issue: 4
Start Page Number: 701
End Page Number: 718
Publication Date: Apr 2016
Journal: Production and Operations Management
Authors: , ,
Keywords: demand, retailing, information
Abstract:

In retailing operations, retailers face the challenge of incomplete demand information. We develop a new concept named K‐approximate convexity, which is shown to be a generalization of K‐convexity, to address this challenge. This idea is applied to obtain a base‐stock list‐price policy for the joint inventory and pricing control problem with incomplete demand information and even non‐concave revenue function. A worst‐case performance bound of the policy is established. In a numerical study where demand is driven from real sales data, we find that the average gap between the profits of our proposed policy and the optimal policy is 0.27%, and the maximum gap is 4.6%.

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