The effectiveness of a simple policy for coordinating inventory control and pricing strategies

Abstract

We investigate the effectiveness of an (s, S, p) policy relative to an (s, S, A, p) policy in a single product, periodic review, finite horizon model with stochastic multiplicative demand and fixed ordering cost, in which an (s, S, A, p) policy is optimal. An extensive numerical study shows that empirically an (s, S, p) policy is highly effective relative to an (s, S, A, p) policy. We also formulate two alternative benchmark policies and find that the (s, S, p) policy is superior in terms of profit. In addition, we propose an efficient algorithm with simulated annealing and modified binary search to determine the (s, S, p) policy for the model.