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Joint pricing, assortment, and inventory decisions for a retailer's product line

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  • Bacel Maddah
  • Ebru K. Bish

Abstract

Consider a set of product variants that are differentiated by some secondary attributes such as flavor, color, or size. The retailer's problem is to jointly determine the set of variants to include in her product line (“assortment”), together with their prices and inventory levels, so as to maximize her expected profit. We model the consumer choice process using a multinomial logit choice model and consider a newsvendor type inventory setting. We derive the structure of the optimal assortment for some important special cases, including the case of horizontally differentiated items, and propose a dominance relationship for the general case that simplifies the search for an optimal assortment. We also discuss structural properties of the optimal prices. Finally, motivated by our analytical results, we propose a heuristic solution procedure, which is shown to be quite effective through a numerical study. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007

Suggested Citation

  • Bacel Maddah & Ebru K. Bish, 2007. "Joint pricing, assortment, and inventory decisions for a retailer's product line," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(3), pages 315-330, April.
    • Handle: RePEc:wly:navres:v:54:y:2007:i:3:p:315-330
    DOI: 10.1002/nav.20209
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    References listed on IDEAS

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    Cited by:

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    2. Hongmin Li & Scott Webster, 2017. "Optimal Pricing of Correlated Product Options Under the Paired Combinatorial Logit Model," Operations Research, INFORMS, vol. 65(5), pages 1215-1230, October.
    3. Ruben van de Geer & Arnoud V. den Boer, 2022. "Price Optimization Under the Finite-Mixture Logit Model," Management Science, INFORMS, vol. 68(10), pages 7480-7496, October.
    4. Wallace J. Hopp & Xiaowei Xu, 2008. "A Static Approximation for Dynamic Demand Substitution with Applications in a Competitive Market," Operations Research, INFORMS, vol. 56(3), pages 630-645, June.
    5. Woonghee Tim Huh & Hongmin Li, 2015. "Technical Note—Pricing Under the Nested Attraction Model with a Multistage Choice Structure," Operations Research, INFORMS, vol. 63(4), pages 840-850, August.
    6. J. Cole Smith & Churlzu Lim & Aydın Alptekinoğlu, 2009. "New product introduction against a predator: A bilevel mixed‐integer programming approach," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(8), pages 714-729, December.
    7. Jalali, Hamed & Carmen, Raïsa & Van Nieuwenhuyse, Inneke & Boute, Robert, 2019. "Quality and pricing decisions in production/inventory systems," European Journal of Operational Research, Elsevier, vol. 272(1), pages 195-206.
    8. Maria Mayorga & Hyun-Soo Ahn & Goker Aydin, 2013. "Assortment and inventory decisions with multiple quality levels," Annals of Operations Research, Springer, vol. 211(1), pages 301-331, December.
    9. Hongmin Li & Scott Webster & Gwangjae Yu, 2020. "Product Design Under Multinomial Logit Choices: Optimization of Quality and Prices in an Evolving Product Line," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 1011-1025, September.
    10. Hongmin Li & Scott Webster & Nicholas Mason & Karl Kempf, 2019. "Product-Line Pricing Under Discrete Mixed Multinomial Logit Demand," Service Science, INFORMS, vol. 21(1), pages 14-28, January.
    11. Refael Hassin & Justo Puerto, 2024. "Pricing heterogeneous products to heterogeneous customers who buy sequentially," Annals of Operations Research, Springer, vol. 340(2), pages 863-890, September.
    12. Schlicher, Loe & Lurkin, Virginie, 2022. "Stable allocations for choice-based collaborative price setting," European Journal of Operational Research, Elsevier, vol. 302(3), pages 1242-1254.
    13. Goker Aydin & Evan L. Porteus, 2008. "Joint Inventory and Pricing Decisions for an Assortment," Operations Research, INFORMS, vol. 56(5), pages 1247-1255, October.
    14. Hong, Zhaofu & Wang, Hao & Yu, Yugang, 2018. "Green product pricing with non-green product reference," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 115(C), pages 1-15.
    15. Kris Johnson Ferreira & Bin Hong Alex Lee & David Simchi-Levi, 2016. "Analytics for an Online Retailer: Demand Forecasting and Price Optimization," Manufacturing & Service Operations Management, INFORMS, vol. 18(1), pages 69-88, February.

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