A study on 'Buy one get one with discount' promotional strategy by dynamic programming

Abstract

Retailers try to maximize their revenues through various promotional strategies such as ‘Discount promotion’ which suggests discounted prices to customers at specific periods, ‘Bundling’ which combines more than one product as a single prices, and ‘buy one get one with discount promotion’ which suggests discounted prices to customers for the second item of a product if purchased. We study optimal pricing policy for retailers who employ the ‘Buy one get one with discount’ in order to maximize their revenues. Therefore, our purpose is to search the optimal price and optimal discount rate through dynamic programming for each state when the selling period is finite and the inventory is limited. We show our model produces customer behaviors reported in literature, and we present numerical result