Coordinating Pricing,Ordering and Advertising for Perishable Products Over an Infinite Horizon

Numerous empirical studies show that advertising effort can stimulate demand in both current and future periods, and there is an interaction between pricing, advertising and ordering decisions. How do these decisions interact with each other and what is the effect of advertising on pricing and ordering decisions? To understand this interaction, we consider a newsvendor-type firm that sells a perishable product in a stable market and dynamically determines the joint ordering, pricing and advertising strategies. The problem is modeled as an infinite horizon newsvendor problem with an advertising carryover effect and price-sensitive demand. We characterize the optimal pricing, advertising and inventory strategies and their comparative statics, and consider how this policy differs from the traditional approach without the advertising effect. We show that the optimal effective advertising level is monotonically increasing with the effective advertising level in the previous period, and hence the optimal strategies (advertising, pricing, inventory level) globally converge to the steady states in the long run. We numerically show that the optimal policy can reap significant profit, which underscores the importance of the advertising-driven ordering and pricing strategies.