Pricing Perishables: Robust Price Assurance

Abstract

As perishable products are worthless at end-of-life, for a given supply prices are often dynamically adjusted to ensure inventory is exhausted at end-of-life. When consumers expect such price reductions, they may strategically time their purchases. These two conditions pose a complex problem for pricing. Given inventory, cost of production is sunk. Thus, the dynamic path for prices must be set to maximize revenues with an eye on inventory take-down as well as to discourage strategic behavior. This problem is further challenged when prices and the extent of consumer strategic behavior are uncertain. This paper presents an approach for pricing a set of perishable products that are highly substitutable, yet differentiated to target a set of consumer segments. We propose and analyze a price assurance scheme as a solution to the strategic behavior of consumers and price uncertainty. We present and evaluate our price assurance approach by comparing two price assurance schemes: i) ex-post price assurance, and ii) ex-ante price assurance to risk neutral dynamic pricing without regard for consumer strategic behavior. These approaches have not to our knowledge been previously considered in our setting of perishables, uncertain consumer strategic behavior, and price uncertainty. Our numerical experiments show that our robust optimization model prevents loss when a firm encounters the worst-case demand and outperforms a risk neutral pricing model. Comparison across our different pricing schemes provides conditions under which particular schemes may dominate others.