Analysis of the benefits of joint price and order quantity optimisation using a deterministic profit maximisation model

Abstract

Joint optimisation of price and order quantity has been proposed in earlier papers as a way to increase a firm's profits. However, most firms are not organised in such a way to support this joint decision. In this paper, we examine the benefits of joint price and order quantity optimisation as compared with a sequential decision process in which the price is determined first, followed by the determination of the order quantity. Numerical studies are performed that provide insight into how often it is advantageous to optimise jointly and how much benefit can be obtained. In general it is found that in many cases joint optimisation is of negligible value although it can be very beneficial in specific cases. Also, the natural tendency of firms to reduce prices and increase market size tends to reduce the benefits of joint optimization. This implies that firms should thoroughly understand their costs and market before incurring the expense of a reorganisation to support joint price and inventory optimisation.

Keywords:

• Inventory
• Price
• Profit
• Optimisation

Acknowledgements

This research was partially supported by the ITESM Research Fund CAT025. We would also like to thank the anonymous reviewers for their comments, which have helped us greatly improve the paper.