Pricing perishable products : an application to the retail industry

This paper studies intertemporal pricing strategies when selling perishable products in retail stores. Initially we present a continuous time model where a seller faces a stochastic arrival of customers with different valuations of the product. For this model, we characterize the optimal pricing policies as functions of time and inventory. We find necessary and sufficient conditions for the optimal pricing strategy, which provide an efficient algorithm to compute the optimal pricing policies. This model is extended to consider a more realistic framework with periodic pricing reviews. We show that the structure of the optimal pricing policies is consistent with the procedures observed in practice; retail stores successively discount the product during the season and promote a liquidation sale at the end of the planning horizon. We also show that the loss experienced when implementing periodic pricing review policies instead of continuous time policies is small when the appropriate number of reviews is chosen. Finally, we generalize the model to the case of a company that has multiple retail stores oriented to different market segments. For this case, we develop a heuristic to solve real size problems; this heuristic has a satisfactory performance with respect to an upper bound that we derive for the optimization problem. The paper also discusses the broader applicability of the models to other industries that have similar features.