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COORDINATED PRICING AND BASE-STOCK POLICIES FOR AN ITEM WITH PRICE AND STOCK-DEPENDENT DEMAND SUBJECT TO DECAY AND FIXED LIFETIME

ABSTRACT We consider a firm who sells a perishable item that is subject to effects of decay and fixed shelf lifetime, facing a price and stock-level dependent demand rate. We assume the firm adopts the base-stock replenishment and the first-in-first-out issuing policies. Our model is a generalized version of the previous work by considering the retail price as a decision variable and taking into account the effect of decay. The objective of the model is to jointly determine the optimal selling price, base-stock level, and inventory cycle over an infinite planning horizon so that the net profit per time unit is maximized. The profit-maximizing problem is formulated as a multivariate optimization model, solved by an iterative search process combined with an enumeration scheme. An intensive numerical study shows that the pricing scheme can be an effective mechanism in profit improvement.