Pricing and Lot Sizing for Seasonal Products in Price Sensitive Environment

Abstract

Some seasonal products have limited sales season, and the demand of such products over the sales season is of increasing-steady-decreasing type. Customers are highly sensitive to the prices of the products. In such situation, adjustment of unit selling price is needed to accelerate inventory depletion rate and for determining order quantity for the sales season. In this paper, we focus on the issue by jointly determining optimal unit selling prices and optimal lot size over the sales season. Unlike the conventional inventory models with pricing strategy, which were restricted to prespecified pricing cycle lengths, that is, fixed number of price changes over the time horizon, we allow the number of price changes to be a decision variable. The mathematical model is developed and existence of optimal solution is verified. A solution procedure is developed to determine optimal prices, optimal number of pricing cycles, and optimal lot size. The model is illustrated by a numerical example. Sensitivity analysis of the model is also carried out.