A Robust Optimization Approach to Dynamic Pricing and Inventory Control with no Backorders

Authors:
Elodie Adida;Georgia Perakis
Affiliations:
Operations Research Center, MIT, 02139, Cambridge, MA, USA;Sloan School of Management, MIT, 02139, Cambridge, MA, USA
Venue:
Mathematical Programming: Series A and B
Year:
2006

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Abstract

In this paper, we present a robust optimization formulation for dealing with demand uncertainty in a dynamic pricing and inventory control problem for a make-to-stock manufacturing system. We consider a multi-product capacitated, dynamic setting. We introduce a demand-based fluid model where the demand is a linear function of the price, the inventory cost is linear, the production cost is an increasing strictly convex function of the production rate and all coefficients are time-dependent. A key part of the model is that no backorders are allowed. We show that the robust formulation is of the same order of complexity as the nominal problem and demonstrate how to adapt the nominal (deterministic) solution algorithm to the robust problem.