Joint inventory allocation and pricing decisions for perishable products

Abstract

We jointly determine the price and the inventory allocation for a perishable product with a predetermined lifetime. We assume that the price of the product increases as the time when it perishes approaches as in the airline industry. Demand for the product is price sensitive. To maximize the expected revenue, we developed a discrete time dynamic programming model to obtain the optimal prices and the optimal inventory allocations for the product with a two period lifetime. We, then, proposed three heuristics when the lifetime is longer than two periods. The computational results showed that the expected revenues from the proposed heuristics were very close to that of the optimal solution. We extended these results to (i) the case where the price for the product consistently decreases; and (ii) the case where the price for the product first increases and later decreases. © 2008 Elsevier B.V. All rights reserved.