Optimal pricing and inventory strategies for fashion products under time-dependent interest rate and demand


Akan M., Albey E., GÜLER M. G.

COMPUTERS & INDUSTRIAL ENGINEERING, vol.154, 2021 (Journal Indexed in SCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 154
  • Publication Date: 2021
  • Doi Number: 10.1016/j.cie.2021.107149
  • Journal Name: COMPUTERS & INDUSTRIAL ENGINEERING
  • Journal Indexes: Science Citation Index Expanded, Scopus, ABI/INFORM, Aerospace Database, Applied Science & Technology Source, Business Source Elite, Business Source Premier, Communication Abstracts, Computer & Applied Sciences, INSPEC, Metadex, DIALNET, Civil Engineering Abstracts
  • Keywords: Pricing, Inventory management, Optimal control, Time-dependent interest rate, Fashion products

Abstract

In this work we consider the dynamic pricing problem of a retailer operating in a market with a single fashion item and under time-dependent interest rate. The demand is assumed to be deterministic and dependent on the price and decay with time, i.e., the market shrinks throughout the horizon. Using an optimal-control-theoretic approach, we analytically derive the optimal pricing and inventory strategy for the retailer over a finite horizon setting. We further analyze the ramifications of the optimal pricing decision for different initial inventory levels dictated by the relationship between the supplier and the retailer; and for varying market interest rates. Optimal dynamic pricing policy is a continuous function, which is almost impossible to use in practice. This is handled using approximate piece-wise constant pricing policies. The trade-off between dynamic pricing policy and approximate policies is also investigated.