Joint pricing and inventory decision under a probabilistic selling strategy
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Joint pricing and inventory decision under a probabilistic selling strategy Yifan Wu1 · Shibo Jin1 Received: 5 November 2018 / Revised: 30 July 2020 / Accepted: 26 August 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract This study examines whether probabilistic selling could enhance inventory management considering market size uncertainty in a rather general setting. We propose to study the impact of probabilistic selling on the profit, price and order quantity within a newsvendor framework. By comparing probabilistic selling against traditional selling, we find that probabilistic selling could generally increase firm’s expected profit. Moreover, the firm will increase the price and the order quantity for the component product. The impact of various aspects, i.e. the demand variance, the unit cost and the degree of cannibalization, on the pricing and order decisions are investigated through numerical experiments. Keywords Probabilistic selling · Newsvendor · Pricing · Inventory
1 Introduction Probabilistic selling (PS) is becoming a prevalent sales tool since its emergence on the Priceline and Hotwire websites. Since then, many service providers (e.g., Germanwings.com) and online travel agents (e.g., LastMinuteTravel.com, Qunar.com) have started to offer similar discounted probabilistic services. A probabilistic good is an offer involving the probability of getting any one of a set of multiple distinct items. For example, the customers will not be informed about the itinerary of the flight or the location of the hotel unless the payment transaction is completed. The popularity of PS in industry and media has attracted increasing attention from academia, mostly in marketing. According to existing literature, the major advantage of this novel selling strategy is to better price discriminate heterogeneous customers (Fay and Xie 2008). Currently, physical products, such as apparel, toys, shoes, umbrellas, are also offered as discounted probabilistic goods by a large number of online retailers * Yifan Wu [email protected] 1
School of Business, East China University of Science and Technology, Shanghai 200237, China
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Y. Wu, S. Jin
(Amazon.com, SwimOutlet.com, ToyWiz.com, Tmall.com, and YHD.com). For example, Fig. 1 presents two screenshots from JD.com, one of the largest online retailers in China. In the screenshots, umbrellas are sold as one probabilistic good (a) and several component goods (b) depending on the colors. Note that the PS price for an umbrella of a random color is RMB 22.90, while a component product of a deep blue color costs RMB 29. However, since PS first appeared in the travel industry, most of the extant studies focus on firm strategies in a service setting. These strategies may no longer apply in general online retailing industry settings because those previous models rarely considered inventory or ordering decisions, which play a crucial role in reducing the mismatch between supply and demand (Wilson et al. 2011). Hence, several natur
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