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Coordinating Pricing, Ordering and Advertising for Perishable Products Over an Infinite Horizon

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Abstract

Numerous empirical studies show that advertising effort can stimulate demand in both current and future periods, and there is an interaction between pricing, advertising and ordering decisions. How do these decisions interact with each other and what is the effect of advertising on pricing and ordering decisions? To understand this interaction, we consider a newsvendor-type firm that sells a perishable product in a stable market and dynamically determines the joint ordering, pricing and advertising strategies. The problem is modeled as an infinite horizon newsvendor problem with an advertising carryover effect and price-sensitive demand. We characterize the optimal pricing, advertising and inventory strategies and their comparative statics, and consider how this policy differs from the traditional approach without the advertising effect. We show that the optimal effective advertising level is monotonically increasing with the effective advertising level in the previous period, and hence the optimal strategies (advertising, pricing, inventory level) globally converge to the steady states in the long run. We numerically show that the optimal policy can reap significant profit, which underscores the importance of the advertising-driven ordering and pricing strategies.

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Acknowledgments

The authors would like to thank the associate editor for his patience and effort in handling this paper and the anonymous referees for their help to greatly improve the quality of the paper.

This research is supported by a grant from National Science Foundation of China (No. 71371146), and a research fund for Academic Team of Young Scholars at Wuhan University (No. Whu2016013).

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Authors and Affiliations

  1. Department of Management Sciences, City University of Hong Kong, Kowloon, Hong Kong, China

    Ye Lu & Yimin Yu

  2. School of Economics and Management, Wuhan University, Wuhan, 430072, China

    Minghui Xu

Authors
  1. Ye Lu
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  2. Minghui Xu
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Corresponding author

Correspondence to Minghui Xu.

Additional information

Ye Lu is an associate professor at Department of Management Sciences, City University of Hong Kong. He received a PhD in operations research from MIT in 2009, a PhD in mathematics from the University of Notre Dame in 2006, and a BS in applied mathematics from Tsinghua University in 2002. His research interest is to develop optimization models and algorithms to solve real world problems. His publications have appeared in Operations Research, Production and Operations Management, and others.

Minghui Xu is a professor in the School of Economics and Management at Wuhan University. He received the B.S. degree, M.S. degree and Ph.D. degree, in 1998, 2001 and 2005, respectively, all from Wuhan University. His research interests include stochastic modeling in logistics and supply chain systems, inventory control and management, interface of operations and marketing, and operations management with risk considerations. His work has been published in journals such as Operations Research, Naval Research Logistics, IIE Transactions, Decision Sciences, European Journal of Operational Research, Journal of System Sciences and System Engineering, et. al.

Yimin Yu is an assistant professor at Department of Management Sciences, City University of Hong Kong. He received his Ph.D. in industrial engineering from the University of Minnesota, Twin Cities. He conducts research in different areas of operations management, with an emphasis on inventory management, service operations, and decision-making with model uncertainty. His publications have appeared in Marketing Science, Production and Operations Management, and others.

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Lu, Y., Xu, M. & Yu, Y. Coordinating Pricing, Ordering and Advertising for Perishable Products Over an Infinite Horizon. J. Syst. Sci. Syst. Eng. 27, 106–129 (2018). https://doi.org/10.1007/s11518-017-5357-1

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