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Mathematical Problems in Engineering
Volume 2014, Article ID 157865, 10 pages
http://dx.doi.org/10.1155/2014/157865
Research Article

Dynamic Pricing of Fashion-Like Multiproducts with Customers’ Reference Effect and Limited Memory

1Business School, Hunan University, Changsha 410082, China
2Business School, Central South University, Changsha 410083, China
3School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China

Received 28 November 2013; Accepted 27 January 2014; Published 13 March 2014

Academic Editor: Xiaohang Yue

Copyright © 2014 Mengqi Liu et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We study a fashion retailer’s dynamic pricing problem in which consumers present reference effect and memory window. Based on the theory of Baucells et al. (2011), we propose a new reference-price updating mechanism in fashion and textile (FT) industry where consumers have a bounded memory window and anchor on the first and most recent price in any memory window. Moreover, we study the impacts of this mechanism on optimal pricing policy for a retailer selling multiple fashion-like products and analyze optimal price’s steady state, monotonicity, and convergence. For two-product case, we find that, for otherwise identical products, the steady-state price of a core product is lower than that of a noncore product. We compute the retailer’s loss of revenue if he incorrectly assumes the reference-price effect to be at the product level and prices the products individually. Further, as illustrated with numerical results, our model is a flexible way to make pricing strategy if the retailer can anticipate the length of consumers’ memory window.