Optimal Discounting and Replenishment Policies for Perishable Products

Abstract

We consider a retailer, selling a perishable product with short shelf-life and uncertain demand, facing these key decisions: (a) whether to discount old(er) items, (b) how much discount to offer, and (c) what should be the replenishment policy. In order to better understand the impact of consumer behavior and shelf-life on these decisions, we consider four models. In Model A, the product has a shelf life of two periods and the retailer decides whether or not to offer a discount. The amount of discount is exogenous and assumed to be large enough so that all the customers prefer the old product to the new one when a discount is offered. Based on several numerical examples, we find that a threshold discounting policy, in which a discount is offered if and only if the inventory of old product is below a threshold, is optimal. In Model B, the retailer also decides how much discount to offer. Model C extends Model B and considers a new pool of customers who are willing to purchase from the retailer when a discount is offered. In both Models B and C, the product has a shelf-life of two periods while Model D explores what happens with longer shelf-life. We analyze and compare these models to present different managerial insights.