Dynamic Pricing in a Dual Market Environment

TL;DR

This paper develops a dynamic pricing model for a firm selling in two markets with different demand fulfillment times, analyzing optimal strategies and market preferences over a finite horizon.

Contribution

It introduces a stochastic demand-based dynamic pricing framework for dual markets with immediate and delayed fulfillment, including conditions for market preference.

Findings

Optimal pricing strategies depend on demand functions and market conditions.

Under certain conditions, one market becomes more profitable than the other.

The model provides insights into inventory allocation between markets.

Abstract

This paper is concerned with the determination of pricing strategies for a firm that in each period of a finite horizon receives replenishment quantities of a single product which it sells in two markets, e.g., a long-distance market and an on-site market. The key difference between the two markets is that the long-distance market provides for a one period delay in demand fulfillment. In contrast, on-site orders must be filled immediately as the customer is at the physical on-site location. We model the demands in consecutive periods as independent random variables and their distributions depend on the item's price in accordance with two general stochastic demand functions: additive or multiplicative. The firm uses a single pool of inventory to fulfill demands from both markets. We investigate properties of the structure of the dynamic pricing strategy that maximizes the total expected discounted profit over the finite time horizon, under fixed or controlled replenishment conditions. Further, we provide conditions under which one market may be the preferred outlet to sale over the other.