Responsive pricing under supply uncertainty

Christopher S. Tang, Rui Yin

Research output: Contribution to journalArticle

44 Citations (Scopus)

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

Fingerprint

Pricing
pricing
uncertainty
supply
Uncertainty
Costs
supplier
Profit
Profitability
profit
Retailers
Supply uncertainty
Two-stage Model
Pricing policy
Discrete Distributions
Stochastic models
selling
Emergency
Linear Function
Probability distributions

Keywords

  • Responsive pricing
  • Supply management
  • Uncertain supply

ASJC Scopus subject areas

  • Information Systems and Management
  • Management Science and Operations Research
  • Statistics, Probability and Uncertainty
  • Applied Mathematics
  • Modeling and Simulation
  • Transportation

Cite this

Responsive pricing under supply uncertainty. / Tang, Christopher S.; Yin, Rui.

In: European Journal of Operational Research, Vol. 182, No. 1, 01.10.2007, p. 239-255.

Research output: Contribution to journalArticle

Tang, Christopher S. ; Yin, Rui. / Responsive pricing under supply uncertainty. In: European Journal of Operational Research. 2007 ; Vol. 182, No. 1. pp. 239-255.
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