Stochastic Optimal Control for Dynamic Pricing and Production in Fashion Retailing: An Economic Sustainability Approach

Abstract

Tis study develops a stochastic optimal control model to optimize dynamic pricing and production strategies for fashion retailers facing uncertain demand and rapid product devaluation. Applying the Hamilton–Jacobi–Bellman equation approach, we derive proft-maximizing joint pricing and production policies. Key fndings include the following: (1) Dynamic pricing and responsive production strategies outperform static pricing in terms of expected discounted proft under various market conditions. (2) Optimal dynamic prices exhibit a declining trend over the product lifecycle, aligning with observed practices in fast fashion. (3) Te optimal production rate adapts to current inventory levels and market conditions, balancing the trade-of between stockouts and holding costs. (4) Te model demonstrates robustness to variations in price elasticity, providing a fexible decision framework for diverse fashion market segments. (5) Extreme demand volatility reduces the economic benefts of dynamic policies, highlighting the need for additional risk management strategies. Tis research contributes to sustainable operations’ literature by integrating pricing and production decisions under uncertainty, ofering theoretically grounded and practical insights for fashion retailers to enhance proftability and reduce waste.