Joint optimization of price and order quantity with shortages for a two-warehouse system

In developing the best strategy for real-world applications, the vendor must have some knowledge of the buyers’ behavior such as response to shortages and price increases. Using this knowledge, he can develop a policy that will ensure the largest net profit. Considering the fact, a two-warehousing inventory model has been developed where the demand is price-sensitive under the bulk release rule. Stockouts are allowed and are fully backlogged. Moreover, the transportation cost is taken to be dependent on the transported units. The model jointly optimizes the selling price and the order quantity by maximizing the system profit. Results have been validated with the help of a numerical example.