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Dynamic Stochastic Inventory Management with Reference Price Effects

Author

Listed:
  • Xin Chen

    (Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana-Champaign, Urbana, Illinois 61801)

  • Peng Hu

    (School of Management, Huazhong University of Science and Technology, Wuhan, China 430074)

  • Stephen Shum

    (College of Business, City University of Hong Kong, Kowloon, Hong Kong)

  • Yuhan Zhang

    (Two Sigma Investments, New York, New York 10013)

Abstract

We analyze the joint inventory and pricing decisions of a firm when demand depends on not only the current selling price but also a memory-based reference price and customers are loss averse. The presence of reference price effect leads to a nonconcave one-period expected revenue in price and reference price. We introduce a transformation technique that allows us to prove under some mild assumptions the optimality of a reference-price-dependent base-stock list-price policy, which is characterized by a base-stock level and a target reference price. In addition, we show that the target reference price is increasing in the reference price, but except in the loss-neutral case, the base-stock level is not monotone in the reference price. We also show that in the steady state of the model with the reference price effect, the optimal price is lower while the optimal base-stock level is higher than their counterparts in the model without the reference price effect.

Suggested Citation

  • Xin Chen & Peng Hu & Stephen Shum & Yuhan Zhang, 2016. "Dynamic Stochastic Inventory Management with Reference Price Effects," Operations Research, INFORMS, vol. 64(6), pages 1529-1536, December.
    • Handle: RePEc:inm:oropre:v:64:y:2016:i:6:p:1529-1536
    DOI: 10.1287/opre.2016.1524
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    References listed on IDEAS

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