Optimal dynamic pricing for clearance sales on the spot market

Abstract

In this thesis, we develop an optimal dynamic pricing strategy for clearance sales of a textile manufacturing company which allows last-minute cancellations of orders without penalty. This company faces the difficult task of determining the optimal prices to clear the unsold products which result from last-minute order cancellations of its customers. The presented results in this thesis provide the company with a mathematical tool which can be used to optimally and dynamically set prices to maximize the profits in the clearance sales. We assume that buyers are myopic, demand multiple units of products and have independent demand. We also assume that the company has limited information on the valuation of buyers. Using these assumptions, an analytical model and estimations from the historical data are developed and dynamic programming is used to devise an optimal dynamic pricing strategy for the clearance sales of the company.