Responsive pricing under supply uncertainty

Christopher S. Tang, Rui Yin

Research output: Contribution to journalArticle

47 Scopus citations

Abstract

Consider a retailer orders a seasonal product from a supplier and sells the product over a selling season. While the product demand is known to be a linear function of price, the supply yield is uncertain and is distributed according to a general discrete probability distribution. This paper presents a two-stage stochastic model for analyzing two pricing policies: No Responsive Pricing and Responsive Pricing. Under the No Responsive Pricing policy, the retailer would determine the order quantity and the retail price before the supply yield is realized. Under the Responsive Pricing policy, the retailer would specify the order quantity first and then decide on the retail price after observing the realized supply yield. Therefore, the Responsive Pricing policy enables the retailer to use pricing as a response mechanism for managing uncertain supply. Our analysis suggests that the retailer would always obtain a higher expected profit under the Responsive Pricing policy. In addition to examining the impact of yield distribution and system parameters on the optimal order quantities, retail prices, and profits under these two pricing policies, we analyze two issues arising from responsive pricing. The first issue deals with the case in which the retailer can place an emergency order with an alternative source after observing the realized yield, while the second issue deals with a situation in which the retailer has to allocate his order among multiple suppliers.

Original languageEnglish (US)
Pages (from-to)239-255
Number of pages17
JournalEuropean Journal of Operational Research
Volume182
Issue number1
DOIs
StatePublished - Oct 1 2007
Externally publishedYes

Keywords

  • Responsive pricing
  • Supply management
  • Uncertain supply

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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