DYNAMIC PRICING AND ORDERING DECISIONS BY A MONOPOLIST

This paper considers the relationship between pricing and ordering dec isions for a monopolistic retailer facing a known demand function wher e, over the inventory cycle, the product may exhibit: (i) physical dec ay or deterioration of inventory called wastage; and (ii) decrease in market value called value drop associated with each unit of inventory on hand. The retailer is allowed to continuously vary the selling pric e of the product over the cycle. We introduce a notion of instantaneou s margin, and use it to derive profit maximizing conditions for the re tailer. The model explains the markdown of retail goods subject to dec ay. It also provides guidance in determining when price changes during the cycle are worthwile due to product aging, how often such changes should be made, and how such changes affect ordering intervals and qua ntities.