Dynamic pricing for perishable items with costly price adjustments

Dynamic pricing for perishable items with costly price adjustments Dynamic pricing is widely adopted in inventory management for perishable items, and the corresponding price adjustment cost should be taken into account. This work assumes that the price adjustment cost comprises of a fixed component and a variable one, and attempts to search for the optimal dynamic pricing strategy to maximize the firm’s profit. However, considering the fixed price adjustment cost turns this dynamic pricing problem to a non-smooth optimal control problem which cannot be solved directly by Pontryagin’s maximum principle. Hence, we first degenerate the original problem into a standard optimal control problem and calculate the corresponding solution. On the basis of this solution, we further propose a suboptimal pricing strategy which simultaneously combines static pricing and dynamic pricing strategies. The upper bound of profit gap between the suboptimal solution and the optimal one is obtained. Numerical simulation indicates that the suboptimal pricing strategy enjoys an efficient performance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Optimization Letters Springer Journals

Dynamic pricing for perishable items with costly price adjustments

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2017 by Springer-Verlag Berlin Heidelberg
Subject
Mathematics; Optimization; Operations Research/Decision Theory; Computational Intelligence; Numerical and Computational Physics, Simulation
ISSN
1862-4472
eISSN
1862-4480
D.O.I.
10.1007/s11590-017-1121-1
Publisher site
See Article on Publisher Site

Abstract

Dynamic pricing is widely adopted in inventory management for perishable items, and the corresponding price adjustment cost should be taken into account. This work assumes that the price adjustment cost comprises of a fixed component and a variable one, and attempts to search for the optimal dynamic pricing strategy to maximize the firm’s profit. However, considering the fixed price adjustment cost turns this dynamic pricing problem to a non-smooth optimal control problem which cannot be solved directly by Pontryagin’s maximum principle. Hence, we first degenerate the original problem into a standard optimal control problem and calculate the corresponding solution. On the basis of this solution, we further propose a suboptimal pricing strategy which simultaneously combines static pricing and dynamic pricing strategies. The upper bound of profit gap between the suboptimal solution and the optimal one is obtained. Numerical simulation indicates that the suboptimal pricing strategy enjoys an efficient performance.

Journal

Optimization LettersSpringer Journals

Published: Feb 23, 2017

References

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