| Summary: | This report studies a two-echelon distribution inventory system with a central warehouse and a number of retailers. The system takes into account only single product, periodic review pricing and inventory control problem for retailers. The retailers face stochastic price-sensitive demand, under quite general modeling assumptions. The system is reviewed periodically and demands that cannot be met directly are backordered. Standard holding and shortage are considered. The retailers’ objective is to maximize its expected profit over the selling horizon by dynamically deciding on the optimal pricing and replenishment policy for each period. We show that, under a mild assumption on the additive demand function, at the beginning of each period, we check for necessity for replenishment, and the value of the optimal price depends on the inventory level after the replenishment decision has been done. Furthermore, the fixed ordering cost (o) plays a significant role in our modeling framework. Specifically, any increase in o results in higher optimal price. We demonstrate that using the optimal policy values from a model with backordering of unmet demands as approximations in our model might result in significant profit penalty.
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