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In this paper, considering a scenario in which there are two quality levels of fresh products and introduction of consumer utility function, we studied the optimal ordering and pricing strategies under certain quantity. Our results showed that, facing the two quality levels of fresh products, retailers would not benefit from sales of lower quality of fresh products with the deterministic demand. In the pursuit of profit maximization, the initial order quantity is smaller than the potential demand for market.

Given the technological advancements and logistical capabilities over the last seven decades or so, perishables have become a large part of supermarket retailing sales. For instance, a report by FMI (2009) indicates that of the $430 billion plus in US supermarket sales registered for the year 2008, 81% or over $348 billion is due to sales of groceries directly related to foods and beverages (F & B). And there is no doubt that fresh foods have played a dramatically important role in china.

Motivated by the common practice, retailers usually divide fresh products, which may decay or deteriorate during the sale process, into different quality levels, and sell them in a separate way. In this paper, considering a scenario in which there are two quality levels of fresh products and introduction of consumer utility function, we studied the optimal ordering and pricing strategies under certain quantity. Then, we discussed how environmental factors, such as demand volatility and ordering costs, affected retailers’ decision. By considering consumer utility to study the optimal ordering and pricing decisions of multi-quality fresh products, we found corresponding answers of the above questions, and gave the management suggestions.

Ordering and pricing of fresh products are within the scope of supply chain management, which has become a hot issue for discussion and research. Goyal et al. (2001), Li et al. (2010), and Bakker et al. (2012) provided a comprehensive introduction about deteriorating items inventory management research from different perspectives [

The remainder of this article is organized as follows. In Section 2, I review the related literature. In Section 3, I describe demand model and the retailer’s profit model, and then I find the solution of base model. In Section 4, I examine how demand affects the retailer’s problem. In Section 5, I give a sensitivity analysis for the results.

Considering a scenario in which a single retailer sells one category fresh product throughout the whole sale period with two stages, there may be residual at the end of one stage, and the retailer can sell the low quality product at the next stage. We assumed that there exist two different quality levels (high and low) to discuss effectiveness of retailers selling decision, ordering and pricing strategies. At the start of period, the retailer procure

assumed to be

retailer has three choices: buy one unit of the low quality product, buy one unit of the high quality product, or do not buy anything. The high and low quality products compete among customers in their attributes and prices. Each customer selects his preferred choice based on his utility from purchasing a unit of product type , which is given by

where

Based on the utility model, I first derive expression for

In the expression 2, there is need to compare

Case 1 When

Case 2 When

Suppose the total number of customers is

The symbol “+” means the expression,

In this section, we solve the optimal ordering and pricing decision according to the retailer’s demand and profit model. As the same, there is different relationship between

Scenario 1: Suppose that

Senario 2: Suppose that

The Hessian for the objective function is given by:

Which is negative definite (

Suppose that

Giving a fresh product as an example, we assume that u is a customer’s quality sensitivity,

are discussions about the optimal decision of retailer and fluctuation of the potential demand for market. We have assumptions about some values of parameters as following tables (

Proposition 1: Facing the two quality levels of fresh products, retailers will not benefit from sales of lower quality of fresh products with the deterministic demand.

Proof 1: From the optimal retailer’s profit

related to high quality factor, ordering and preserving costs. This is because retailer sells low quality products at a discount price, which still needs to undertake ordering and preserving costs. Therefore, the retailer sells low quality fresh products only to minimum the loss and does not make profit from it.

Proposition 2: To realize the optimal profit, the retailer’s initial ordering quantity is smaller than the potential demand for market.

0.3 | 1.5 | 1 | 0.2 |

2.5 | |||

3.5 |

100 | 13.3 | 1.3 | 0.7 | 2.7 |

28 | 1.8 | 19.6 | ||

34.3 | 2.3 | 41 | ||

200 | 26.6 | 1.3 | 0.7 | 5.4 |

56 | 1.8 | 39.2 | ||

68.2 | 2.3 | 82 | ||

300 | 39.9 | 1.3 | 0.7 | 7.1 |

74 | 1.8 | 58.8 | ||

102.9 | 2.3 | 123 |

Proof 2: From

mainly because the retailer sells high quality fresh product at a higher price to make more profit. As long as the retailer has low ordering and preservation costs, it will have the motive to repeat order, which is consistent with zero inventory and rapid inventory turnover in operation management.

This paper focuses on multiple quality fresh products and considers consumer utility to analyze the retailer’s optimal ordering and pricing strategies. Our results showed that, facing the two quality levels of fresh products, retailers would not benefit from sales of lower quality of fresh products with the deterministic demand. In the pursuit of profit maximization, the initial order quantity is smaller than the potential demand for market. Possible extensions of this paper involve relaxing some of assumptions, for example, considering random customer arrival process and demand substitution of high and low quality products.