Continuously Increasing Price in an Inventory Cycle: An Optimal Strategy for E-Tailers

Abstract

Operations researchers have always assumed that when a product's unit cost is constant and its demand curve is known and stationary, a retailer of the product would find it optimal to replenish the inventory with a fixed quantity and to sell the product always at a fixed price. We present, with proof, a model that shows that, in such a case, an e-tailer is better off using a continuously increasing price strategy than using a fixed price strategy within each inventory cycle. Sensitivity analysis shows that this strategy is particularly profitable when demand is highly price sensitive and the inventory ordering and carrying costs are high.