Pricing and inventory control for a product with time-varying cost and demand

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Motivated by a problem faced by a flat panel television distributor, we consider product replenishment and pricing decision making problem for the (durable) product with short life cycle. Specifically, we consider joint pricing and inventory control in an inventory system where the procurement cost may be time-varying and the demand may depend on the cumulative past sales. The procurement cost of a product is closely related to the production cost which may reduce over time due to learning effect or increase due to increased raw material and labor cost. While such phenomena are pervasive, they have not been well-studied in the literature in general. We first focus on identifying the structure of the inventory control when the procurement cost varies over time. The second part of our proposed research focuses on the durable product with short life cycles such as cell phones, TVs and computers. It has been well-studied in the marketing literature on the diffusion of the innovative (durable) product. Both theoretical model and empirical evidence supports that the sales during the product life cycle change over time and are dependent on cumulative past sales. We study optimal pricing and inventory control in such environment; this extends the existing literature that usually assumes the current demand does not depend on past sales. Then, we consider a hybrid of the above two models, where the demand is dependent on past cumulative sales, and the procurement cost is time-sensitive. Finally, we propose an empirical validation for the above models.