Dynamic pricing and quick response of a retailer in the presence of strategic consumers: A distributionally robust optimization approach

A distributionally robust optimization approach is developed for the two-period pricing and initial or-dering decisions for a retailer with quick response capability in the presence of strategic consumers. The consumers have heterogeneous tastes for the product valuation, and the consumer taste is assumed to follow a uniform distribution. The market size is uncertain with its mean and standard deviation as the only known information. The product value decreases over time, and the selling season is divided into a regular period and a discount period. Two distributionally robust dynamic pricing models with and with-out quick response are developed and are transformed into tractable mathematical programming models. The closed-form solutions are derived, and the effects of the parameter values on the optimal decisions and on the expected profits are examined analytically, for the model with quick response. The conditions for dynamic pricing to benefit the retailer with quick response are discussed. Two model extensions are provided with the consumer taste following a general distribution in one extension and the discount fac-tor being stochastic in the other. Numerical experiments are conducted to verify the effectiveness and practicality of the proposed approach in coping with market size uncertainty. The effects of the param-eter values on the retailer optimal decisions and on the expected profit are further examined through sensitivity analyses. The optimal decisions and the expected profits are compared for the retailer with and without quick response, and managerial insights are provided.(c) 2022 Elsevier B.V. All rights reserved.

Automated summary

This paper develops a distributionally robust optimization approach for the pricing and ordering decisions of a retailer with quick response capability in the presence of strategic consumers. The paper considers heterogeneous consumer tastes and uncertain market size. Two distributionally robust dynamic pricing models are proposed, one with quick response and one without. Closed-form solutions are derived, and the effects of parameter values on optimal decisions and expected profits are analyzed. The paper also discusses the conditions for dynamic pricing to benefit the retailer with quick response.