Optimal pricing and inventory strategies with multiple price markdowns over time

We study a multiple period discount problem for products that undergo several price cuts over time. In the high-technology sector, electronic component suppliers are often able to offer pre-announced price cuts to buyers due to technological innovation that allows them to produce existing components at lower costs. In this context, suppliers are primarily concerned with the optimal pricing decisions for the components over their life spans in order to achieve the highest possible revenues. Accordingly, the buying firms (i.e., manufacturers or retailers) also need to identify the corresponding optimal retail prices and order quantity for the finished products that utilize the components for which discounts are offered frequently. In this research, we develop a multiple-period price discount model that addresses this issue. Extant research in the price discount literature focuses on supply chains’ pricing and inventory decisions in the presence of a single price discount. The proposed model, in contrast, offers a systematic decision tool for identifying the optimal strategies throughout a product's life span. Our results show that a decentralized supply chain characterized by multi-period discounts over a product's life typically achieves 75 percent supply chain efficiency. We undertake a series of numerical experiments based on the model and discuss their managerial implications.