Clearance Pricing and Inventory Policies for Retail Chains

Clearance pricing and end of season inventory management are challenging and important problems in retailing. Sales rates depend upon price, seasonal effects, and the remaining assortment of items available to customers. There is little time to react to observed sales, and pricing errors result in either loss of potential revenue or excess inventory to be liquidated. This paper develops optimal clearance prices and inventory management policies that take into account the impact of reduced assortment and seasonal changes on sales rates. Versions of these policies have been tested and implemented at three major retail chains and these applications are summarized and discussed.