Pricing and Inventory Decisions for an Assortment Under EOQ Supply and Logit Demand

Abstract

The topic of pricing and revenue optimization is receiving increasing interest as time evolves, especially in the retailing field. With the advance in technology comes an increase of sophistication in the algorithms used for pricing and related decisions in retail operations. The increasingly quantitative approaches adopted by researchers of the retailing field aims to incorporate and integrate retail data with emerging technologies. The retailer’s profit is tightly tied to three main decisions: pricing, inventory (shelf) and assortment. Determining prices and assortment is typically the main concern of the marketing department of a firm, while the operations department handles ordering from suppliers and stocking decisions. This paper takes an integrative view, in-line with the modern paradigm in the literature, and jointly analyzes pricing and inventory decisions for a given assortment of substitutable products. The demand is based on a multinomial logit consumer choice which is highly effective in capturing real-world consumer’s behavior. The supply framework adopted is that of the EOQ (Economic Ordering Quantity) model which exploits the balance between economies of scales in ordering and inventory financing cost.