Pricing and Inventory Control Policies for Perishable Products

Abstract

The supply chain of a retailer selling a perishable product with a shelf life of two periods is modeled over an infinite horizon. In each period, the retailer has the option to sell old (leftover inventory from previous period) and new (produced fresh at the beginning of the period) products. The consumer preference for old and new products is modeled through a multinomial logit (MNL) model. Demand substitution is also modeled. We analyze different classes of inventory and pricing control policies, and find the optimal policy and retailer's profit per period in each case. What is the extra benefit that the retailer gets from offering old products? What is the benefit that she gets by having her decisions - quantity to produce, prices for old and new products - depend on the inventory of old products? We attempt to answer these questions in the paper.