Dynamic Pricing and Inventory Control for a Perishable Product under Network Externality

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Abstract

We study the joint dynamic pricing and inventory control of a monopolist selling a perishable product. Dynamic pricing is an efficient policy for selling the products with a maximum lifetime that are known as perishable products. In many real cases, retailers use an expiration date based pricing (EDBP), in which price of a perishable product is reduced according to its remaining lifetime to encourage the customers to purchase less-fresh products. A major concern for using of this policy is that reduced prices have a negative impact on customers’ perception of quality. Indeed, it is shown that EDBP leads customers to assume that the quality of product must have decreased. Thus, successfully EDBP policy requires customers’ favorable perception of the products and their acceptance. One suggested way that have been discussed in the literature to prevent of this negative effect is to provide greater familiarity with the practice. This means that customers does not use the fact of price reduction to infer a reduction in product quality. In this paper, in order to contract the negative quality inference, we consider a social communication network associated with the product as a collaborative selling component. This communication network allows to customers to continue to bond with each other and share their purchasing and consumption experiences of the product to improving the perceived quality of product and thus acceptance of the EDBP policy. We assume that a customer’s willingness-to-pay (WTP) increases according to size of the network. This phenomenon is known as the network externality. We investigate the effect of network externality upon a retailer’s pricing and inventory policy for a perishable product with a two-period life time. Results show that a significant profit loss and perishables waste is incurred when the network externality is ignored

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