22,412 research outputs found

    Pricing Perishables

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     A key feature of food products is their perishability. Within the short marketing window that characterizes most food and ag products, demand is typically highly stochastic and difficult to predict. This combination of features poses substantial challenges to retailers when pricing products and has implications for performance that ripples through vertical food chains. For many food products, processing to forms that can be preserved and held in inventory has traditionally been used as a means of coping with these conditions, despite its high costs and ancillary risks introduced such as change in product attributes and deterioration. This paper presents an alternative ERM strategy that focuses on dynamic pricing to control the rate of sale for perishable products. The paper considers a retailer that has market power to price and supplies perishable products to a market with substitute products and demand originating from heterogeneous consumers. Perishability implies a finite horizon for the marketing of the products over which demand across market segments of consumers is both dynamic and stochastic. Faced with uncertainty, we suppose the firm has limited information about the stochastic properties of demand and must choose a pricing strategy that projects over the market horizon. This price trajectory represents a key control mechanism to cope with uncertainty of both the perishability of the product and of demand

    Smart Pricing: Linking Pricing Decisions with Operational Insights

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    The past decade has seen a virtual explosion of information about customers and their preferences. This information potentially allows companies to increase their revenues, in particular since modern technology enables price changes to be effected at minimal cost. At the same time, companies have taken major strides in understanding and managing the dynamics of the supply chain, both their internal operations and their relationships with supply chain partners. These two developments are narrowly intertwined. Pricing decisions have a direct effect on operations and visa versa. Yet, the systematic integration of operational and marketing insights is in an emerging stage, both in academia and in business practice. This article reviews a number of key linkages between pricing and operations. In particular, it highlights different drivers for dynamic pricing strategies. Through the discussion of key references and related software developments we aim to provide a snapshot into a rich and evolving field.supply chain management;inventory;capacity;dynamic pricing;operations-marketing interface

    Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies

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    The concept of diminishing marginal utility is a cornerstone of economic theory. The consumption of a good typically creates satiation that diminishes the marginal utility of consuming more. Temporal satiation induces consumers to increase their stimulation level by seeking variety and therefore substitute towards other goods (substitutability across time) or other differentiated versions (products) of the good (substitutability across products). The literature on variety-seeking has developed along two strands, each focusing on only one type of substitutability. I specify a demand model that attempts to link these two strands of the literature. This issue is economically relevant because both types of substitutability are important for retailers and manufacturers in designing intertemporal price discrimination strategies. The consumer demand model specified allows consumption to have an enduring effect and the marginal utility of the different products to vary over consumption occasions. Consumers are assumed to make rational purchase decisions by taking into account, not only current and future satiation levels, but also prices and product choices. I then use the model to evaluate the demand implications of a major pricing policy change from hi-low pricing to an everyday low pricing strategy. I find evidence that consumption has a lasting effect on utility that induces substitutability across time and that the median consumer has a taste for variety in her product decisions. Consumers are found to be forward-looking with respect to the duration since the last purchase, to price expectations and product choices. Pricing policy simulations suggest that retailers may increase revenue by reducing the variance of prices, but that lowering the everyday level of prices may be unprofitable.Variety seeking; Intertemporal effects of consumption; product switching; Pricing; Dynamic demand;

    On Policies for Single-leg Revenue Management with Limited Demand Information

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    In this paper we study the single-item revenue management problem, with no information given about the demand trajectory over time. When the item is sold through accepting/rejecting different fare classes, Ball and Queyranne (2009) have established the tight competitive ratio for this problem using booking limit policies, which raise the acceptance threshold as the remaining inventory dwindles. However, when the item is sold through dynamic pricing instead, there is the additional challenge that offering a low price may entice high-paying customers to substitute down. We show that despite this challenge, the same competitive ratio can still be achieved using a randomized dynamic pricing policy. Our policy incorporates the price-skimming technique from Eren and Maglaras (2010), but importantly we show how the randomized price distribution should be stochastically-increased as the remaining inventory dwindles. A key technical ingredient in our policy is a new "valuation tracking" subroutine, which tracks the possible values for the optimum, and follows the most "inventory-conservative" control which maintains the desired competitive ratio. Finally, we demonstrate the empirical effectiveness of our policy in simulations, where its average-case performance surpasses all naive modifications of the existing policies

    Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships

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    Price variation for identical cars at the same dealership is commonly assumed to arise because dealers with market power are able to price discriminate among their customers. In this paper we show that while price discrimination may be one element of price variation, price variation also arises from inventory fluctuations. Inventory fluctuations create scarcity rents for cars that are in short supply. The price variation due to inventory fluctuations thus functions to efficiently allocate particular cars that are in restricted supply to those customers who value them most highly. Our empirical results show that a dealership moving from a situation of inventory shortage to an average inventory level lowers transaction prices by about 1% ceteris paribus, corresponding to 15% of dealers' average per vehicle profit margin or $250 on the average car. Shorter resupply times also decrease transaction prices for cars in high demand. For traditional dealerships, inventory explains 49% of the combined inventory and demographic components of the predicted price. For so-called 'no-haggle' dealerships, the percentage explained by inventory increases to 74%.

    Pricing Perishables with Uncertain Demand, Substitutes, and Consumer Heterogeneity

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    Within the marketing window for perishables such as food products, demand uncertainty is complicated by price sensitivity and propensity to postpone purchase that is heterogeneous across consumers. These features pose substantial challenges to retailers when pricing multiple products over time and across consumer segments. Getting the dynamic profile of prices right has implications for performance of vertical food chains ranging from revenues to food waste. This paper proposes an approach to dynamic pricing that is demonstrated to improve performance within this setting
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