IDEAS home Printed from https://ideas.repec.org/a/eee/proeco/v164y2015icp105-117.html
   My bibliography  Save this article

An integrated approach to price differentiation and inventory decisions with demand leakage

Author

Listed:
  • Raza, Syed Asif

Abstract

Price differentiation is among widely practiced tools in Revenue Management (RM) in which a seller offers same or slightly different products (or services) at different prices to its customers. Earlier research studies have shown that the benefits from price differentiation are evident when the market segmentation is assumed to be perfect. In a perfect market segmentation, customers associated with a market segment do not move between market segments. However, it is not uncommon to observe that a market segmentation a firm operates in is seldom prefect, and due to imperfect segmentation customers move between market segments which is also referred to as demand leakage. In addition, the firms predominantly experience stochastic demand and thus a firm experiences both the short sales and leftovers due to demand uncertainty. This research proposes a model to address the issue of an optimal market segmentation using price differentiation as a tool. We also establish an integrated framework for pricing, order and (production) quantity allocation decisions in each market segment when a firm experiences demand leakage from one market segment to another and faces price-dependent stochastic demand. The model is analyzed to determine an optimal decision framework on pricing, order quantity allocation, and market segmentation using the proposed price differentiation. Due to the complexity of the problem, both the hierarchical and joint optimization approaches are developed. A simplified closed-form optimal solution to the problem is outlined in the case of hierarchical approach. The model is also analyzed for a situation in which the distribution of the price-dependent stochastic demand is unknown and a distribution-free approach is utilized to address the problem. It is identified that the use of distribution-free approach also results in a closed-form optimal solution to the problem. A numerical study is presented to demonstrate the performance of the model and solution approaches. The benefits of the optimal market segmentation using a differentiation price are also highlighted along with the proposed integrated optimal decision framework when a firm experiences demand leakage.

Suggested Citation

  • Raza, Syed Asif, 2015. "An integrated approach to price differentiation and inventory decisions with demand leakage," International Journal of Production Economics, Elsevier, vol. 164(C), pages 105-117.
    • Handle: RePEc:eee:proeco:v:164:y:2015:i:c:p:105-117
    DOI: 10.1016/j.ijpe.2014.12.020
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0925527314004149
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijpe.2014.12.020?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wu, Zhengping & Crama, Pascale & Zhu, Wanshan, 2012. "The newsvendor’s optimal incentive contracts for multiple advertisers," European Journal of Operational Research, Elsevier, vol. 220(1), pages 171-181.
    2. Liao, Yi & Banerjee, Avijit & Yan, Changyuan, 2011. "A distribution-free newsvendor model with balking and lost sales penalty," International Journal of Production Economics, Elsevier, vol. 133(1), pages 224-227, September.
    3. Michael Zhang & Peter C. Bell, 2010. "Fencing in the context of revenue management," International Journal of Revenue Management, Inderscience Enterprises Ltd, vol. 4(1), pages 42-68.
    4. Zhang, Michael & Bell, Peter C. & Cai, Gangshu (George) & Chen, Xiangfeng, 2010. "Optimal fences and joint price and inventory decisions in distinct markets with demand leakage," European Journal of Operational Research, Elsevier, vol. 204(3), pages 589-596, August.
    5. Wei, Cansheng & Li, Yongjian & Cai, Xiaoqiang, 2011. "Robust optimal policies of production and inventory with uncertain returns and demand," International Journal of Production Economics, Elsevier, vol. 134(2), pages 357-367, December.
    6. Zhou, Erfeng & Zhang, Juzhi & Gou, Qinglong & Liang, Liang, 2015. "A two period pricing model for new fashion style launching strategy," International Journal of Production Economics, Elsevier, vol. 160(C), pages 144-156.
    7. Alfares, Hesham K. & Elmorra, Hassan H., 2005. "The distribution-free newsboy problem: Extensions to the shortage penalty case," International Journal of Production Economics, Elsevier, vol. 93(1), pages 465-477, January.
    8. Xu, Xiaolin & Cai, Xiaoqiang & Chen, Youhua, 2011. "Unimodality of price-setting newsvendor's objective function with multiplicative demand and its applications," International Journal of Production Economics, Elsevier, vol. 133(2), pages 653-661, October.
    9. Güler, M. Güray & Bilgiç, Taner & Güllü, Refik, 2014. "Joint inventory and pricing decisions when customers are delay sensitive," International Journal of Production Economics, Elsevier, vol. 157(C), pages 302-312.
    10. Murray, Chase C. & Gosavi, Abhijit & Talukdar, Debabrata, 2012. "The multi-product price-setting newsvendor with resource capacity constraints," International Journal of Production Economics, Elsevier, vol. 138(1), pages 148-158.
    11. Wen-Chyuan Chiang & Jason C.H. Chen & Xiaojing Xu, 2007. "An overview of research on revenue management: current issues and future research," International Journal of Revenue Management, Inderscience Enterprises Ltd, vol. 1(1), pages 97-128.
    12. Georgiadis, George & Tang, Christopher S., 2014. "Optimal reservation policies and market segmentation," International Journal of Production Economics, Elsevier, vol. 154(C), pages 81-99.
    13. T. M. Whitin, 1955. "Inventory Control and Price Theory," Management Science, INFORMS, vol. 2(1), pages 61-68, October.
    14. Martin A. Lariviere, 2006. "A Note on Probability Distributions with Increasing Generalized Failure Rates," Operations Research, INFORMS, vol. 54(3), pages 602-604, June.
    15. Lee, Chih-Ming & Hsu, Shu-Lu, 2011. "The effect of advertising on the distribution-free newsboy problem," International Journal of Production Economics, Elsevier, vol. 129(1), pages 217-224, January.
    16. Kevin Chiang, Wei-yu & Monahan, George E., 2005. "Managing inventories in a two-echelon dual-channel supply chain," European Journal of Operational Research, Elsevier, vol. 162(2), pages 325-341, April.
    17. Mostard, Julien & de Koster, Rene & Teunter, Ruud, 2005. "The distribution-free newsboy problem with resalable returns," International Journal of Production Economics, Elsevier, vol. 97(3), pages 329-342, September.
    18. Jammernegg, Werner & Kischka, Peter, 2013. "The price-setting newsvendor with service and loss constraints," Omega, Elsevier, vol. 41(2), pages 326-335.
    19. Zhang, Michael & Bell, Peter C., 2007. "The effect of market segmentation with demand leakage between market segments on a firm's price and inventory decisions," European Journal of Operational Research, Elsevier, vol. 182(2), pages 738-754, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ghasemy Yaghin, R. & Farmani, Zahra, 2023. "Planning a low-carbon, price-differentiated supply chain with scenario-based capacities and eco-friendly customers," International Journal of Production Economics, Elsevier, vol. 265(C).
    2. Davide Castellano & Mosè Gallo & Liberatina C. Santillo, 2021. "A periodic review policy for a coordinated single vendor-multiple buyers supply chain with controllable lead time and distribution-free approach," 4OR, Springer, vol. 19(3), pages 347-388, September.
    3. Raza, Syed Asif & Turiac, Mihaela, 2016. "Joint optimal determination of process mean, production quantity, pricing, and market segmentation with demand leakage," European Journal of Operational Research, Elsevier, vol. 249(1), pages 312-326.
    4. Ma, Shouyu & Jemai, Zied & Bai, Qingguo, 2022. "Optimal pricing and ordering decisions for a retailer using multiple discounts," European Journal of Operational Research, Elsevier, vol. 299(3), pages 1177-1192.
    5. Raza, Syed Asif & Govindaluri, Srikrishna Madhumohan, 2019. "Pricing strategies in a dual-channel green supply chain with cannibalization and risk aversion," Operations Research Perspectives, Elsevier, vol. 6(C).
    6. Raza, Syed Asif & Rathinam, Sivakumar, 2017. "A risk tolerance analysis for a joint price differentiation and inventory decisions problem with demand leakage effect," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 129-145.
    7. Syed Asif Raza, 2020. "Price Differentiation and Inventory Decisions in a Socially Responsible Dual-Channel Supply Chain with Partial Information Stochastic Demand and Cannibalization," Sustainability, MDPI, vol. 12(22), pages 1-42, November.
    8. Raza, Syed Asif, 2018. "Supply chain coordination under a revenue-sharing contract with corporate social responsibility and partial demand information," International Journal of Production Economics, Elsevier, vol. 205(C), pages 1-14.
    9. Ben Ali, M. & D’Amours, S. & Gaudreault, J. & Carle, M-A., 2018. "Configuration and evaluation of an integrated demand management process using a space-filling design and Kriging metamodeling," Operations Research Perspectives, Elsevier, vol. 5(C), pages 45-58.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Raza, Syed Asif & Rathinam, Sivakumar, 2017. "A risk tolerance analysis for a joint price differentiation and inventory decisions problem with demand leakage effect," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 129-145.
    2. Raza, Syed Asif & Govindaluri, Srikrishna Madhumohan, 2019. "Pricing strategies in a dual-channel green supply chain with cannibalization and risk aversion," Operations Research Perspectives, Elsevier, vol. 6(C).
    3. Raza, Syed Asif & Turiac, Mihaela, 2016. "Joint optimal determination of process mean, production quantity, pricing, and market segmentation with demand leakage," European Journal of Operational Research, Elsevier, vol. 249(1), pages 312-326.
    4. Bai, Qingguo & Xu, Jianteng & Gong, Yeming & Chauhan, Satyaveer S., 2022. "Robust decisions for regulated sustainable manufacturing with partial demand information: Mandatory emission capacity versus emission tax," European Journal of Operational Research, Elsevier, vol. 298(3), pages 874-893.
    5. Qingguo Bai & Jianteng Xu & Yuzhong Zhang, 2022. "The distributionally robust optimization model for a remanufacturing system under cap-and-trade policy: a newsvendor approach," Annals of Operations Research, Springer, vol. 309(2), pages 731-760, February.
    6. Serel, Doğan A., 2017. "A single-period stocking and pricing problem involving stochastic emergency supply," International Journal of Production Economics, Elsevier, vol. 185(C), pages 180-195.
    7. Syed Asif Raza, 2020. "Price Differentiation and Inventory Decisions in a Socially Responsible Dual-Channel Supply Chain with Partial Information Stochastic Demand and Cannibalization," Sustainability, MDPI, vol. 12(22), pages 1-42, November.
    8. Zhang, Michael & Bell, Peter C. & Cai, Gangshu (George) & Chen, Xiangfeng, 2010. "Optimal fences and joint price and inventory decisions in distinct markets with demand leakage," European Journal of Operational Research, Elsevier, vol. 204(3), pages 589-596, August.
    9. Wang, Charles X. & Webster, Scott & Zhang, Sidong, 2014. "Robust price-setting newsvendor model with interval market size and consumer willingness-to-pay," International Journal of Production Economics, Elsevier, vol. 154(C), pages 100-112.
    10. Guo, Peijun & Ma, Xiuyan, 2014. "Newsvendor models for innovative products with one-shot decision theory," European Journal of Operational Research, Elsevier, vol. 239(2), pages 523-536.
    11. Avittathur, Balram & Biswas, Indranil, 2017. "A note on limited clearance sale inventory model," International Journal of Production Economics, Elsevier, vol. 193(C), pages 647-653.
    12. Hui Yu & Jia Zhai & Guang-Ya Chen, 2016. "Robust Optimization for the Loss-Averse Newsvendor Problem," Journal of Optimization Theory and Applications, Springer, vol. 171(3), pages 1008-1032, December.
    13. Su, Rung Hung & Pearn, Wen Lea, 2011. "Product selection for newsboy-type products with normal demands and unequal costs," International Journal of Production Economics, Elsevier, vol. 132(2), pages 214-222, August.
    14. Sarkar, Biswajit & Moon, Ilkyeong, 2014. "Improved quality, setup cost reduction, and variable backorder costs in an imperfect production process," International Journal of Production Economics, Elsevier, vol. 155(C), pages 204-213.
    15. Kyparisis, George J. & Koulamas, Christos, 2018. "Optimal pricing and seat allocation for a two-cabin airline revenue management problem," International Journal of Production Economics, Elsevier, vol. 201(C), pages 18-25.
    16. Kuo-Hsien Wang & Yu-Je Lee & Che-Tsung Tung, 2013. "Optimal Prices and Inventories Decisions on Returns Policy with Practical Examples Thorough a Stackelberg Game," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(2), pages 66-77, April.
    17. Ying Gao & Jianteng Xu & Huixin Xu, 2021. "A Flexible Cap-and-Trade Policy and Limited Demand Information Effects on a Sustainable Supply Chain," Sustainability, MDPI, vol. 13(19), pages 1-23, September.
    18. Abad, Prakash, 2014. "Determining optimal price and order size for a price setting newsvendor under cycle service level," International Journal of Production Economics, Elsevier, vol. 158(C), pages 106-113.
    19. Yunzeng Wang, 2006. "Joint Pricing-Production Decisions in Supply Chains of Complementary Products with Uncertain Demand," Operations Research, INFORMS, vol. 54(6), pages 1110-1127, December.
    20. Qiu, Ruozhen & Sun, Minghe & Lim, Yun Fong, 2017. "Optimizing (s, S) policies for multi-period inventory models with demand distribution uncertainty: Robust dynamic programing approaches," European Journal of Operational Research, Elsevier, vol. 261(3), pages 880-892.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:proeco:v:164:y:2015:i:c:p:105-117. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ijpe .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.