Optimal inventory decisions in a capacitated online retailing system with customer priorities

Comparing with the traditional retailers, online retailers are playing quite important roles in the contemporary retailing channels. They offer more options for their customers, like flexible delivery, pricing, etc. In this paper, we consider an inventory system where customers may have different priorities under the retailer's capacity. A single supplier who must invest in capacity to manufacturer and sell products to buyers having different priorities. The buyers can place pre-orders before their demand is observed, and can also issue additional orders upon observing demand information. Since the supplier guarantees delivery of pre-ordered goods (these are not constrained by the supplier's capacity), buyers with lower priorities may consider pre-ordering in order to secure inventory. We derive optimal policies for the supplier and buyers. We show surprisingly that it is optimal for the supplier to set the pre-order price so high that pre-ordering will not be used much even though pre-ordering should be of benefit to the supplier due to risk sharing. We also show that the supplier can make a pricing decision using an aggregate model.