Reference effect and inventory constraint on optimal pricing for daily perishable products

This paper considers a discount pricing problem for a monopolist firm which sells daily perishable products. The products are marked down at the end of day when they are likely to be unsold in order to increase the day´s revenue of the firm. The discount sale, however, drops consumers´ reference prices, with which the consumers judge if the selling price of the product is a gain or a loss. The declined reference price reduces the future demand for the products sold at a regular price, which is called the reference effect on demand. This paper formulates the discount pricing problem taking both reference effects and an inventory constraint into account in order to derive an optimal pricing computed by dynamic programming. Numerical experiments illustrate that the amount of predicted unsold products significantly influences the optimal pricing policy.