Inventory And Pricing Management In Probabilistic Selling

The Marketing and Strategy literature on probabilistic selling has demonstrated the advantage of probabilistic selling on market expansion,market segmentation,price discrimination,and product line extension.A few studies on Operations Management also investigate the promising ability of probabilistic selling as an effective tool to manage inventory.Though an emerging literature suggests that these novel marketing strategies are promising and have broad potential applications,this is still a relatively new area for both researchers and practitioners.Furthermore,sellers have implemented different forms of probabilistic selling in practice and their profitability has not been proved.Many of the corresponding inventory and pricing problems need to be solved to take full advantage of the opportunity of these marketing strategies.However,limited attention has been paid to examining the inventory management of probabilistic selling from the perspective of Operations Management,which cannot meet the needs of decision-making in reality.Considering different characteristics of the probabilistic product,the buyer,and the seller involved in probabilistic selling,i.e.,the probabilistic product form,the buyers'behaviours of demand switch and barter exchange,and the seller's behaviours of product allocation,we establish model and solve the decision problems of pricing,inventory,joint decision of pricing-inventory,and product allocation,etc.Then we compare the probabilistic selling with traditional selling,the probabilistic selling with barter choice and without barter choice,the probabilistic selling with inventory substitution with respect to optimal decisions and profitability respectively.Finally,we give some management insights based on the analysis of optimal decision and strategy comparison results.On the one hand,the thesis shed some light on the inventory mechanism of probabilistic selling on managing demand and supply uncertainty,which facilitates decision-making process of the sellers to take advantage of probabilistic selling.On the other hand,it riches related Operational Management research on inventory management in probabilistic selling.The main work and contribution for this thesis are as follows:First,endogenizing the inventory decision in probabilistic selling,we construct a new newsboy-type inventory model with demand reshape and demand substitution.We analyze the expected profit function,solve the optimal inventory decision,and finally analytically derive some properties of the effect of price for the probabilistic product on the optimal inventory decision.The results show that the optimal inventory decision in probabilistic selling to that in the traditional newsboy-type model.If there is an increase in the price of the probabilistic product,the retailer should order more of one product and less of the other when the difference of their substitution possibilities is large.And,when the difference is not large,the retailer should increase the inventory of both products.Second,considering demand reshape depends on the price discount,we construct newsboy-type inventory model and get the optimal inventory decision and expected profit.Then we compare probabilistic selling with traditional selling to generate insights into using probabilistic selling to manage demand uncertainty through demand reshape and demand substitution.The results show that there exist the optimal price discount to secure the performance of the probabilistic selling,given that unsuitable price discount will lead to lower expected profit.Therefore,probabilistic selling can benefit the seller with higher expected profit and lower inventory by reducing the demand uncertainty and improving inventory efficiency.Probabilistic selling is more advantageous with higher customers'price sensitivity,and higher demand uncertainty.Third,we explore the profitability and pricing-inventory policy when the seller offers packaged probabilistic product.We find and analytically examine the risk-pooling effect through demand reshape in probabilistic selling.The analytical results show that probabilistic selling is more advantageous with lower product differentiation and higher customers' price sensitivity.The computational results show that probabilistic selling can also help to diversify the asymmetrical supply risk,resulting in higher profit and service level than the traditional selling.Fourth,we explore the pricing-product allocation policy when the seller offers barter choice in probabilistic selling.In addition,we also address the effect of barter choice on product line design,i.e.,the seller merely offers the component products,merely the probabilistic product,or both.Finally,we address the question that can and when does barter make probabilistic selling more advantageous to the seller?The results show that when the marketing benefit is sufficiently large,barter can always increase the profit of probabilistic selling to the seller.When the marketing benefit is low while the barter probability is high,barter will not benefit the seller in probabilistic selling.We find a successful barter probability threshold for offering the specific products if offering barter choice is beneficial for the retailer.Above the threshold,the probabilistic product will cannibalize all the component product sales,and then the seller prefers to fully cover the market and offer merely the probabilistic product.When the successful barter probability is below the threshold,barter can increase the profit of probabilistic selling when the product cost is medium and the cost ranges increase with the successful barter probability.Fifth,we compare the performance of probabilistic selling and inventory substitution in managing demand uncertainty through demand substitution.The results show that probabilistic selling is more profitable with relatively lower product similarity and higher price-sensitive customers,while inventory substitution outperforms probabilistic selling with higher product similarity.Higher demand uncertainty will increase the profitability advantage of probabilistic selling over inventory substitution.