Optimal pricing and base-stock replenishment for an item with price and stock-dependent demand subject to a fixed lifetime and random decay under fifo policy

We consider a retailer who sells a perishable item that is subject to effects of fixed shelf lifetime and continuous decay, facing a price and stock-level dependent demand rate. We assume the retailer adopts the base-stock replenishment and the first-in-first-out issuing policies. Our model is a generalized version of the previous work by considering the retail price as a decision variable and taking into account the effect of random decay in the newsboy-type problem. The objective of the model is to jointly determine the optimal selling price, base-stock level, and inventory cycle over an infinite planning horizon so that the net profit per time unit is maximized. The profit-maximizing problem is formulated as a multivariate optimization model, solved by an iterative search process combined with an enumeration scheme. Numerical results reveal that the demand-side pricing scheme is more effective than the supply-side inventory control mechanism in profit maximization.