Welfare Implications Of Inventory Driven Dynamic Pricing

We argue that dynamic pricing motivated by the management of inventory holding and ordering costs leads to increased operational efficiencies which could benefit firms without hurting consumers. To demonstrate this point, we equip the traditional economic order quantity (EOQ) setting with a rich set of demand models and compare social outcomes under two alternatives, dynamic and static pricing. We show that dynamic pricing generates higher retailer profits, a lower average price per unit sold, and higher sales volumes than static pricing. The mechanism behind the result is that with dynamic pricing the retailer ties the price of each unit to its holding costs, which allows him to increase the order quantity compared to static pricing and thus save on fixed ordering costs. Some of these cost savings are passed to consumers. Moreover, we demonstrate that this mechanism is robust to the presence of price-anticipating (strategic) consumer behavior.

Dynamic pricing is designed to increase revenues or profits of the firm by adjusting prices in response to changes in the marginal value of capacity as described in Gallego and van Ryzin (1994). While thousands of papers have been written about dynamic pricing, this is to our knowledge the first paper to examine the impact of dynamic pricing in Gallego and van Ryzin (1994) on social welfare and consumers' surplus. We present a dynamic pricing formulation designed to maximize welfare and show that the optimal policy has the same structural property as the revenue-maximizing dynamic pricing policy. For sufficiently constrained systems, we show that the revenue maximizing dynamic pricing policy and the market clearing price are both asymptotically optimal for welfare. We also find that in most cases dynamic pricing improves consumers' surplus compared to the optimal static price for a revenue-maximizing firm. Our findings can potentially change the public image of dynamic pricing, and lead to rich managerial insights as well as policy implications: (1) for large-scale systems with scarce capacity, the central planner and a monopoly firm would essentially implement the same pricing policy; (2) a revenue-maximizing dynamic pricing policy can benefit customers when the demand elasticity is in a small bounded interval as is the case for several important demand functions.

We study an average-cost stochastic inventory control problem in which the firm can replenish inventory and adjust price at anytime. We establish the optimality to change the price from low to high in each replenishment cycle as inventory is depleted. With costly price adjustment, scale economies of inventory replenishment are reflected in the cycle time instead of lot size -- An increased fixed ordering cost leads to an extended replenishment cycle but does not necessarily increase the order quantity. A reduced marginal cost of ordering calls for an increased order quantity, as well as speeding up product selling within a cycle. We derive useful properties of the profit function that allows for reducing computational complexity of the problem. For systems requiring short replenishment cycles, the optimal solution can be easily computed by applying these properties. For systems requiring long replenishment cycles, we further consider a relaxed problem that is computational tractable. Under this relaxation, the sum of fixed ordering cost and price adjustment cost is equal to (greater than, less than) the total inventory holding cost within a replenishment cycle when the inventory holding cost is linear (convex, concave) in the stock level. Moreover, under the optimal solution, the time-average profit is the same across all price segments when the inventory holding cost is accounted properly. Through a numerical study, we demonstrate that inventory-based dynamic pricing can lead to significant profit improvement compared with static pricing and limited price adjustment can yield a benefit that is close to unlimited price adjustment. To be able to enjoy the benefit of dynamic pricing, however, it is important to appropriately choose inventory levels at which the price is revised.

We study the effect of strategic consumer behavior on pricing, inventory decisions, and inventory release policies of a monopoly retailer selling a single product over two periods facing uncertain demand. We consider the following three-stage two-period dynamic pricing game. In the first stage the retailer sets his inventory level and inventory release policy; in the second stage the retailer faces uncertain demand that consists of both myopic and strategic consumers. The former type of consumers purchase the good if their valuations exceed the posted price, while the latter type of consumers consider future realizations of prices, and hence their future surplus, before deciding when to purchase the good; in the third stage, the retailer releases its remaining inventory according to the release policy chosen in the first stage. Game theory is employed to model strategic decisions in this setting. Each of the strategies available to the players in this setting (the consumers and the retailer) are solved backward to yield the subgame perfect Nash equilibrium, which allows us to derive the equilibrium pricing policies. This work provides three primary contributions to the fields of dynamic pricing and revenue management. First, if, in the third stage, inventory is released to clear the market, then the presence of strategic consumers may be beneficial for the retailer. Second, we find the optimal inventory release strategy when retailers have capacity limitation. Lastly, we numerically demonstrate the retailer's optimal decisions of both inventory level and the inventory release strategy. We find that market clearance mechanism and intermediate supply strategy may emerge as the retailers optimal choice.

This important book is by top scholars in supply chain management, revenue management, and e-commerce, all of which are grounded in information technologies and consumer demand research. The book looks at new selling techniques designed to reach the consumer.

This volume explores East Asia's macroeconomic experience in the 1980s and the economic impact of East Asia's growth on the rest of the world. The authors explore the causes of capital flows, changes in trade balances, and exchange rate fluctuations in East Asia and their effects on other countries. These fourteen papers are organized around four themes: the overall determinants of growth and trading relations in the East Asian region; monetary policies in relation to capital controls and capital accounts; the impact of exchange rate behavior on industrial structure; and the potential for greater regional integration. The contributors examine interactions among exchange rate movements, trade balances, and capital flows; how government monetary policy affects capital flows; the effect of exchange rates on industrial structure, inventories, and prices; and the extent of regional integration in East Asia.