Combined pricing and inventory control under uncertainty

This paper addresses the simultaneous determination of pricing and inventor y replenishment strategies in the face of demand uncertainty. More specific ally, we analyze the following single item, periodic review model. Demands in consecutive periods are independent, but their distributions depend on t he item's price in accordance with general stochastic demand functions. The price charged in any given period can be specified dynamically as a functi on of the state of the system. A replenishment order may be placed at the b eginning of some or all of the periods. Stockouts are fully backlogged. We address both finite and infinite horizon models, with the objective of maxi mizing total expected discounted profit or its time average value, assuming that prices can either be adjusted arbitrarily (upward or downward) or tha t they can only be decreased. We characterize the structure of an optimal c ombined pricing and inventory strategy for all of the above types of models . We also develop an efficient value iteration method to compute these opti mal strategies. Finally, we report on an extensive numerical study that cha racterizes various qualitative properties of the optimal strategies and cor responding optimal profit values.