Optimal ordering and pricing in a quick response system

Quick response systems enable retailers to estimate customer demand more accurately, and improve stocking decisions for perishable products with uncertain demand. Retailers place separate orders for a product at two different times before the selling season. Following the initial order, additional market information is obtained, and the second-order amount is decided based on an improved demand forecast. In some cases, purchase cost associated with the second order is uncertain, and demand for the product during the season depends on the selling price. We present a solution procedure for finding the optimal order quantity and selling price in this setting. We also study the case where any desired portion of the initial order can be cancelled after updating the demand forecast. In the numerical study, the optimal price is observed to be relatively insensitive to changes in demand variability.