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OPERATIONS RESEARCH Vol. 56, No. 5, SeptemberOctober 2008, pp. 12471255

Vol. 56, No. 5, September­October 2008, pp. 1247­1255
issn 0030-364X eissn 1526-5463 08 5605 1247
doi 10.1287/opre.1080.0562
© 2008 INFORMS
Joint Inventory and Pricing Decisions for
an Assortment
Goker Aydin
Department of Industrial and Operations Engineering, The University of Michigan,
Ann Arbor, Michigan 48109, ayding@umich.edu
Evan L. Porteus
Graduate School of Business, Stanford University, Stanford, California 94305, eporteus@stanford.edu
We seek optimal inventory levels and prices of multiple products in a given assortment in a newsvendor model (single
period, stochastic demand) under price-based substitution, but not stockout-based substitution. We address a demand model
involving multiplicative uncertainty, motivated by market share models often used in marketing. The pricing problem that
arises is known not to be well behaved in the sense that, in its deterministic version, the objective function is not jointly
quasi-concave in prices. However, we find that the objective function is still reasonably well behaved in the sense that there
is a unique solution to the first-order conditions, and this solution is optimal for our problem.
Subject classifications: inventory/production: multi-item, pricing, stochastic; marketing: choice models, pricing, retailing,


Source: Aydin, Goker - Department of Operations and Decision Technologies, Indiana University Bloomington


Collections: Engineering