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Joint pricing and inventory control with substitutable products

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Revenue management is the use of pricing and inventory control strategies used to balance supply and demand in a revenue-maximizing manner. Although pricing and inventory control decisions are closely related, limited published research exists that investigates their interdependence. This article proposes static deterministic optimization models that combine pricing and inventory control strategies for a firm with multiple-products and multiple-resources; these models include substitution effects among products. Under relatively mild assumptions on the relationship between demand and price, the proposed pricing and inventory models are formulated as non-linear programming models with concave objective functions and linear constraints. In addition, it is established that, for each pricing problem solved, there is an equivalent inventory control problem. Important properties of the proposed models are investigated, and related results are derived. Illustrative examples that consider linear market demand curves with and without substitution effects are provided.

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en

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application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-126.pdf

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Copyright INSEAD. All rights reserved