Knowledge that Transforms

We examine the dynamic inventory liquidation problem, in which a retailer liquidates a fixed number of identical items over a time period by strategically setting prices periodically according to knowledge about stochastic demand. We propose to solve the liquidation problem by deriving a deterministic representation of stochastic demand. Assuming that customer arrival and valuations follow known statistical distributions (e.g., estimated from past transaction data), the expected arrivals and expected order statistics of valuation distributions represent informative and advantageous approximations of demand. Under the deterministic demand representation, we develop a greedy heuristic for finding the optimal liquidation strategy that result in maximum total revenue. The heuristic approach is computationally highly efficient and provides optimal solutions under deterministic demand representation when customer valuation follows various typical statistical distributions. Compared with two simple and commonly used liquidation strategies (i.e., the fixed-price strategy and the fixed-quantity strategy), our heuristic yields higher liquidation revenue. Compared with sophisticated approaches that can find optimal liquidation strategies under stochastic demand (e.g., stochastic dynamic programming), our approach runs several magnitudes faster and still yields near optimal expected revenue. Therefore, the heuristic approach can serve as a useful tool for managers to make liquidation-related decisions in realistic, stochastic demand scenarios.

The open internet is plagued by congestion that restricts the development of sophisticated internet-based services. Broadband and edge providers have proposed a two-tier internet with a fee-based fast lane that coexists with the open internet. This requires a restriction of internet openness, also known as network neutrality, in the fast-lane internet. Opponents of a two-tier internet believe it would hinder innovation and cause underinvestment in the open internet. The challenge is for policy to balance a fee-based fast lane with the viability of the open internet. We find that edge providers with greater bandwidth requirements per unit of output convert to the fast lane and that the fast lane can drive innovation from edge providers with high bandwidth requirements. The broadband provider chooses fixed fee pricing for the fast lane but has no incentive to increase internet capacity as long as the open internet is not monetized. With no investments in internet capacity, all edge providers of the open Internet and their end users are worse off with a two-tier internet. To maintain quality-of-service in the open internet and to increase social welfare, a two-tier internet has to be coupled with policy whereby a portion of broadband provider profit is invested in internet capacity.