Joint ordering and pricing strategies for managing substitutable products

Christopher S. Tang, Rui Yin

Research output: Contribution to journalArticle

47 Scopus citations

Abstract

Starr and Rubinson (1978) develop a model to establish the relationship between product demand and relative prices. The notion of relative prices motivates us to consider a situation in which a retailer would either charge the same retail price for all products if he adopts a 'fixed' pricing strategy or charge different prices for different products if he adopts a 'variable' pricing strategy. In this paper, we develop a base model with deterministic demand that is intended to examine how a retailer should jointly determine the order quantity and the retail price of two substitutable products under the fixed and variable pricing strategies. Our analysis indicates that the optimal retail price under the variable pricing strategy is equal to the optimal retail price under the fixed pricing strategy plus or minus an adjustment term. This adjustment term depends on product substitutability and price sensitivity. We also present two different extensions of our base model. In the first extension, our analysis indicates that the underlying structure of the optimal retail price and order quantity is preserved when there is a limit on the total order quantity. The second extension deals with the issue of retail competition. Relative to the base case, we show that the underlying structure of the optimal retail price and order quantity is preserved in a duopolistic environment. Moreover, our analysis suggests that both retailers would adopt the variable pricing strategy at the equilibrium.

Original languageEnglish (US)
Pages (from-to)138-153
Number of pages16
JournalProduction and Operations Management
Volume16
Issue number1
DOIs
StatePublished - Jan 1 2007
Externally publishedYes

Keywords

  • Marketing and manufacturing interfaces
  • Mathematical models
  • Ordering and pricing
  • Substitutable products

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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