Optimal pricing and ordering decisions with reference effect and quick replenishment policy

This paper considers a revenue management problem in which a retailer determines joint pricing and ordering decisions for a single product over a two-period selling horizon. The goal is to investigate the single and combined influences of reference effect (RE) and quick replenishment (QR) policy on the customers' purchasing behaviors, the retailer's optimal decisions, and the total profit of two periods. We first propose a discrete-time joint pricing and ordering model with RE and QR policy in the presence of strategic customers. Then we extend to the other two models, in which the retailer does not implement the QR policy and the retailer ignores the customers' RE, to, respectively, explore the values of RE and QR policy to the retailer. Several significant results and managerial insights are derived through theoretical analysis and numerical experiments. Implementing the QR policy could help the retailer cut nearly half of the initial order quantity and improve the profit significantly, especially when the strength of RE is large and the storage cost is high. With the QR policy, if the retailer ignores the RE that factually exists in the customers' minds, she would set lower prices, place fewer initial order quantity, and lose much profit, especially when she sells luxury products or the customers' purchasing behaviors are strongly affected by RE.

Automated summary

This paper examines a revenue management problem where a retailer makes joint pricing and ordering decisions for a single product over two selling periods, investigating the impact of reference effect (RE) and quick replenishment (QR) policies on customer behavior, retailer decisions, and total profit. Results show that implementing the QR policy can significantly improve profit by reducing initial order quantity, especially with strong RE and high storage costs. Ignoring customer RE may lead to lower prices, fewer orders, and reduced profit, especially for luxury products or RE-sensitive customers.