Optimal pricing and replenishment policy in a declining price sensitive environment under continuous unit cost decrease (Q553942)

Summary: Decreasing component price and diminishing demand over time due to introduction of upgraded versions of components are now important characteristics of high-tech industrial market. From a practical point of view there is a need for searching ideal selling price and lot-size over a finite time horizon for a retailer when purchase cost and customers demand decrease rapidly. In this paper we address the issue by jointly determining lot-size and optimal prices for an inventory system which experiences continuous unit cost decrease under time and price dependent decreasing demand structure. It is assumed that the decision maker has the opportunity to adjust replenishment cycle lengths and selling prices, which depends on unit purchase cost, to enhance demand. A mathematical model is developed and existence of the optimal solution is verified. Closed form values of the prices and number of price changes are derived. A solution procedure is developed to determine lot-size, prices and number of pricing cycles. The model is illustrated by a numerical example.