Optimal fences and joint price and inventory decisions in distinct markets with demand leakage

Document Type

Article

Publication Date

8-2010

Publisher

Elsevier

Abstract

This paper evaluates the simultaneous determination of price and inventory replenishment when a firm faces demand from distinct market segments. A firm utilizes fences, such as advance or nonrefundable payment, to maintain separation of its market segments; however, fences are imperfect and allow a degree of demand leakage from the higher-priced to the lower-priced market segment. We investigate the optimal structure of joint price and inventory decisions with fencing, and demonstrate that more segments is not necessarily better, especially when demand uncertainty is high in the presence of lost sales. We also show the impact of imperfect fences on the firm’s profitability, and evaluate how fencing costs affect the optimal fencing decision.

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