Title: Pricing and inventory policies under price-tracking behaviour

Authors: Leo MacDonald, Chris K. Anderson, Henning Rasmussen

Addresses: Department of Economics, Finance and Quantitative Analysis, Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144, USA. ' School of Hotel Administration, Cornell University, 335 Statler Hall, Ithaca, NY 14853 6902, USA. ' Department of Applied Mathematics, Middlesex College, University of Western Ontario, Room 254A, London, ON N6A 5B7, Canada

Abstract: We develop a demand rate model for the optimisation of retail sales of perishable assets when consumers track prices over the sales horizon. We model this behaviour within an aggregate demand framework, solving the initial joint inventory and pricing problem when the demand is deterministic as well as stochastic. We solve the problem numerically and discuss the specific results as well as the characteristics of the optimal price and inventory levels. We illustrate when firms are likely to choose a penetration vs. skimming pricing policy and describe solution updating procedure as actual sales occur.

Keywords: penetration pricing; inventories; inventory policies; revenue management; retailing; retail sales; perishable assets; price-tracking; customer behaviour; demand rate models; aggregate demand; deterministic demand; stochastic demand; skimming pricing; updating procedures; strategic consumers.

DOI: 10.1504/IJRM.2010.029900

International Journal of Revenue Management, 2010 Vol.4 No.1, pp.1 - 21

Published online: 02 Dec 2009 *

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