GUILLERMO GALLEGO

GUILLERMO GALLEGO

GUILLERMO GALLEGO

Crown Worldwide Professor
HKUST

Asymptotically Optimal Policies for Multi-Item Joint Inventory and Dynamic Pricing Control with Stockout-based Substitution
We propose asymptotically optimal policies for a joint inventory and price control problem where the seller replenishes substitute products only once and dynamically controls the prices during the selling season to maximize the total expected profit. Considering complexity of the problem especially when the problem size is large and there exists dynamic stockout-based substitution by customers, we propose an efficient nonlinear program to determine the prices and a linear complementarity problem to decide on inventory levels reflecting consumer-driven substitution for given prices. We also show that a simple heuristic to dynamically update prices can further improve expected profits.