Impact of customer behavior on price and inventory management

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Pricing decision is one of the most common forms of marketing practices. It requires thorough understanding of all the factors that affect customers' ultimate purchase decisions. For most of the firms, pricing is not a static decision anymore. With the help of data processing technology and e-commerce, dynamic pricing has become more of a necessary capability that helps firms better match their supply with demand and increase their competitive advantage. In order to achieve this goal, a firm now has to continuously decide on when, how frequently and how much to change prices of its offerings. However, there are two issues related to dynamic pricing which, if not appropriately taken into account, can cause more damage than good. First issue is about the increased importance of coordination between pricing and operational planning decisions. Second issue is about the interaction between pricing decisions and customer behavior. In this research proposal, we address both issues and plan to build analytical and large scale optimization models in order to study the roles of customer behavior in coordinated price and inventory management. Our proposed research plan has three primary components. First, we plan to develop a framework to model customer behavior and analyze it in deterministic production/inventory ordering setting. Next, we intend to extend the analysis by incorporating uncertainties in operational and marketing environment. Finally, we intend to develop decomposition approaches for inventory control and pricing problems in complex supply chains. This research will be among the first to develop novel models that consider the entire scope of the problem associated with dynamic pricing, from supply management -- procuring materials at the right time -- to demand management - understanding customer behavior and setting prices accordingly. In addition, we will modify and apply existing techniques from a wide variety of related fields, and particularly the latest advances in customer behavior modeling in marketing and inventory and price coordination in operations in order to develop a thorough understanding of these models.