The dynamic pricing problem from a newsvendor's perspective

George E. Monahan, Nicholas C. Petruzzi, Wen Zhao

Research output: Contribution to journalArticle

78 Citations (Scopus)

Abstract

The dynamic pricing problem concerns the determination of selling prices over time for a product whose demand is random and whose supply is fixed. We approach this problem in a novel way by formulating a dynamic optimization model in which the demand function is isoelastic but the random demand process is quite general. Ultimately, what we find is a strong parallel between the dynamic pricing problem and dynamic inventory models. This parallel leads to a reinterpretation of the dynamic pricing problem as a price-setting newsvendor problem with recourse, which is useful not only because it yields insights into the optimal solution, but also because it leads to additional insights into how pricing recourse affects the actions and profits of a price-setting newsvendor. We make contributions in three areas: First, we develop structural properties that define an optimal pricing strategy over a finite horizon and investigate how that policy impacts a newsvendor's optimal procurement policy and optimal expected profit. Second, we establish a practical and efficient algorithm for computing the optimal prices. Third, we examine how market parameters affect the optimal solution through a series of numerical experiments that utilize the algorithm.

Original languageEnglish (US)
Pages (from-to)73-91
Number of pages19
JournalManufacturing and Service Operations Management
Volume6
Issue number1
DOIs
StatePublished - Dec 1 2004

Fingerprint

Dynamic pricing
Newsvendor
Optimal solution
Price setting
Profit
Pricing
Pricing strategy
Newsvendor problem
Demand function
Inventory model
Optimal pricing
Finite horizon
Optimization model
Policy impact
Dynamic optimization
Structural properties
Numerical experiment
Random demand
Procurement

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

Cite this

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The dynamic pricing problem from a newsvendor's perspective. / Monahan, George E.; Petruzzi, Nicholas C.; Zhao, Wen.

In: Manufacturing and Service Operations Management, Vol. 6, No. 1, 01.12.2004, p. 73-91.

Research output: Contribution to journalArticle

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