A comparison of different demand models for joint inventory-pricing decisions

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Abstract:

Pricing and inventory research often focuses on stylized models to illustrate pricing and ordering decision dynamics. Although decision insight is useful, the individual retailer faces tougher decisions on actually modeling demand. In an effort to understand the impact of demand modeling choices on inventory and pricing decisions, we evaluated different price-dependent demand models and the resulting profit produced through their implementation. To avoid complications created by other demand drivers, for example promotional and advertising activities, we illustrate the impacts with data from a name-your-price retailer selling a commoditized product where price is the key driver. As our data are provided by a third-party intermediary, we capture all demand requests in the marketplace versus obtaining sales only from a single retailer, enabling us to truly evaluate the profit impacts of price modeling decisions. Our choice of data set also obviates the censoring issues often associated with the evaluation of inventory and pricing decisions. A goal of the article is to provide a practitioner with helpful advice on choosing a modeling approach for joint pricing and inventory decisions.

Document Type: Research Article

DOI: http://dx.doi.org/10.1057/rpm.2011.32

Affiliations: 1: Ivey School of Business, The University of Western Ontario, 1151 Richmond Street, London, ON N6A 3K7, Canada 2: Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, Georgia 30152, USA 3: Cornell University, School of Hotel Administration, Ithaca, New York 14850, USA

Publication date: November 1, 2011

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