Optimal pricing in retail: a Cox regression approach

Purpose – The purpose of this paper is to study the optimal pricing problem that retailers are challenged with when dealing with seasonal products. The friction between expected demand and realized demand creates a risk that supply during the season is not cleared, thus forcing the retailer to markdown overstocked supply. Design/methodology/approach – The authors propose a framework based on a Cox regression analysis to determine optimal markdown paths. They illustrate this framework by a case study on a large department store. Findings – The framework allows one to determine when and how much to markdown in order to optimize expected total profit given the available supply. When the law of demand holds at a disaggregated level, i.e. the individual retailer, it is also possible to optimize the markdown path. Originality/value – This paper provides a framework for the complex dynamic pricing problem in retail using transactional data. The case study shows that significant revenues can be generated when applying this framework.