Pricing and inventory decisions in an EOQ setting under logit demand -

Abstract

This thesis considers pricing and inventory decisions of a product under logit demand. The logit demand model is adopted as it accurately mimics the consumer choice process. On the supply side, we choose the framework of the Economic Ordering Quantity (EOQ) model. Our analysis proceeds sequentially. For a given price, we determine the optimal order quantity that maximizes the profit. We then analyze the resulting corresponding profit at this optimal inventory level, as a function of the price. We develop simple bounds on the optimal price, and establishing that the profit function is unimodal (pseudo-concave) over the range defined by these bounds. Then, we perform post-optimality analysis includes comparative statics results that analytically establish the monotonicity of the optimal price in several of the model parameters (such as the unit holding cost and fixed ordering cost). Also, we study the effect of the supply-side on pricing by comparing the risky p*price, to the riskless price p°.We provide a simple equation to solve for the optimal price, and we use this equation to get a closed-form approximation for the optimal price. Finally, numerical results are included to obtain further insights.