Optimizing Inventory and Pricing for Substitute Products with Soft Supply Constraints

Abstract

This paper presents a profit optimization model for substitute products in a competitive, time-sensitive market with scarcity and shifting user preferences. The model maximizes profit, considering production costs and inventory maintenance. It uses a discrete choice model to represent demand, sensitivity to price, availability, and changing preferences. A two-phase PSO-type metaheuristic solution tackles the nonlinear, recursive model, efficiently managing inventories and evolving consumer preferences. The model integrates production decisions, inventories, and sales prices, considering scarcity conditions and user preferences. It uses a multinomial logit for the consumers’ demand function with soft exogenous constraints, which influence utility and change consumption preferences and choices. This research offers a tool for companies to manage stock, production, and pricing in a context where goods are substitutes, providing a new perspective on business strategy.

Keywords

• inventory
• pricing
• intertemporal
• substitute products
• multinomial logit