Simulation study of the price differentiation effect in a stochastic deteriorating inventory with heterogeneous consumers – freshness sensitivity

Abstract

A fixed price policy regardless of expiration date may result in unsold inventory and sales loss. Price reduction over time as the expiration date approaches motivates customers to purchase all items, including the ones that are left with only a short interval until their expiration. We conduct a discrete event simulation that captures the main characteristics of this phenomenon. Results show that a moderate differentiation of price increases profits by 6%, a larger differentiation reduces profits. Profits are the highest for freshness-oriented customers. A fixed price policy is preferred in an environment of large variance and expected near term expirations.

Keywords:

• perishable inventory
• random lifetime
• random demand
• price differentiation
• freshness customers’ sensitivity

JEL Classification:

• D4
• L2
• M3