Expiration date-based pricing and inventory control under network externality

Expiration Date-Based Pricing (EDBP) is a prevalent policy for selling perishable products in many grocery retailers. In practice, retailer discounts a perishable product according to its remaining lifetime to encourage customers to purchase less-fresh ones, and by this reduces waste. However, since price usually perceived as quality cue, major concern for using EDBP is that reduced prices have a negative impact on customers’ perception of quality. Indeed, it is shown that EDBP leads customers to assume that the quality of the product must have decreased. Thus, successfully EDBP policy requires customers’ favorable perception of the products and their acceptance. According to pricing literature, customer’s familiarity with the practice attenuates the customers’ negative perception of this practice. This means that familiar customers do not use the fact of price reduction to infer a reduction in product quality. In this paper a social communication network is used as an information campaign to make customers more familiar with EDBP and increase perceived quality of a product which is exposure to an EDBP practice. It is assumed that customers who purchase the product can join to the network and share their purchasing and consumption experiences, and thereby exhibit network externality onto potential customers in future. Coordinated inventory and pricing (discounting) decisions for a perishable product with arbitrary lifetime under network externality is therefore determined in a periodic review inventory system.

Keywords:

Inventory Control , Network Externality , Perishable Product , Expiration date , Dynamic programming