Dynamic stochastic inventory management with reference price effects

Xin Chen, Peng Hu, Stephen Shum, Yuhan Zhang

Research output: Contribution to journalArticle

Abstract

We analyze the joint inventory and pricing decisions of a firm when demand depends on not only the current selling price but also a memory-based reference price and customers are loss averse. The presence of reference price effect leads to a nonconcave one-period expected revenue in price and reference price. We introduce a transformation technique that allows us to prove under some mild assumptions the optimality of a reference-price-dependent base-stock list-price policy, which is characterized by a base-stock level and a target reference price. In addition, we show that the target reference price is increasing in the reference price, but except in the loss-neutral case, the base-stock level is not monotone in the reference price. We also show that in the steady state of the model with the reference price effect, the optimal price is lower while the optimal base-stock level is higher than their counterparts in the model without the reference price effect.

Original languageEnglish (US)
Pages (from-to)1529-1536
Number of pages8
JournalOperations Research
Volume64
Issue number6
DOIs
StatePublished - Nov 1 2016

Keywords

  • Base-stock list-price policy
  • Dynamic pricing
  • Loss averse
  • Reference price effects
  • Stochastic inventory

ASJC Scopus subject areas

  • Computer Science Applications
  • Management Science and Operations Research

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