Optimal dynamic pricing and ordering decisions for perishable products

Abstract

In this paper, we determine the order quantity and the prices for a perishable product with a multiple period lifetime, Demands for products of different ages are dependent on the prices of mutually "substitutable" products. The problem for a product with lifetime of two periods is first analyzed and the stochastic dynamic programming model is developed. Given the inventory level for the old product (product of age 2), the expected profit is a concave function of the order quantity, the price of the new product (product of age 1) and the discounted price of the old product (product of age 2). The computational results show that the total profit significantly increases when demand transfers between products of different ages are considered. For a product with lifetime of longer than two periods, a heuristic based on the optimal solution for a single period problem is proposed for a multiple period problem. (C) 2014 Elsevier B.V. All rights reserved.