Joint optimal inventory, dynamic pricing and advertisement policies for non-instantaneous deteriorating items

¹ School of Industrial Engineering, College of Engineering, University of Tehran, P.O. Box 11155 /4563 Tehran, Iran.
mrabani@ut.ac.ir
² Ph.D. student, School of industrial engineering and systems, Amirkabir University of Technology, Tehran, Iran.
³ Department of Industrial Engineering, Faculty of Engineering, College of Farabi, University of Tehran, Iran.

Received: 15 April 2016
Accepted: 4 November 2016

Abstract

In this paper, a novel model for dynamic pricing and inventory control of non-instantaneously deteriorating items is proposed. To reflect the dynamic nature of the problem, the selling price is modeled as a time-dependent function of the initial selling price and the discount rate. To this end, the product is sold at the initial price value for a time period; then its price is exponentially discounted to boost customer demands. The demand rate is a function of dynamic price, advertisement and changes in price over time. The model seeks to maximize total profit of the system by determining the optimal replenishment cycle, initial price, discount rate, and frequency of advertisement. In order to characterize the optimal solution, some useful theoretical results are derived upon which an iterative solution algorithm is developed. To demonstrate validity of the proposed model and applicability of the developed algorithm, numerical results are provided that are accompanied by an efficient sensitivity analysis on the important parameters of the model.