Robust optimization approach for pricing and shelf space decisions with uncertain demand

Abstract

Pricing and shelf space allocation are two main operational decisions in the retailing industry. This study simultaneously optimizes these two decisions in a supply chain with two manufacturers and one retailer under uncertainty of demand and price sensitivity parameters. Two manufacturers have different conditions in terms of parameters affecting demand and production. A robust optimization model and an exact solution approach are developed to find the optimal solution. The results show that price sensitivity, market potential, and production costs can have a synergistic effect on optimal values. Moreover, the market potential can rely on managerial decisions as it has a significantly positive impact on profitability. This parameter is found to be the most important tool for securing the profitability of supply chain members.