Incentive Design and Pricing Under Limited Inventory

Problem definition: A firm faces random demand for a service it delivers on a given future date. To boost demand, the firm hires a sales agent who exerts unobservable effort continuously over time. The firm is concerned not only with increasing current demand but also with smoothing demand over time to avoid losing goodwill if realized demand exceeds available inventory. Methodology/results: We study the firm's incentive design problem using a novel continuous-time principal-agent framework, in which demand drifts over time in response to the agent's unobserved effort as well as the price the firm charges. To induce the agent's sales effort, the firm chooses an incentive scheme that depends on the remaining inventory and the time to the service (e.g., time to departure in the case of airlines). We characterize the firm's optimal incentive scheme under both static and dynamic pricing policies. Using parameter values calibrated from the airline industry, we numerically show that under dynamic pricing, the use of a static incentive scheme helps the firm reap nearly all the benefits of the corresponding dynamic incentive scheme. In contrast, the use of a fully static strategy results in a significant loss of efficiency. Managerial implications: Comparing partially dynamic strategies, we find that dynamic contracting outperforms dynamic pricing when inventory is abundant. However, under limited inventory, the relative advantage depends non-monotonically on demand elasticity: dynamic pricing dominates over the empirically relevant range of moderate to high elasticity, whereas dynamic contracting becomes more effective when elasticity is very low or in theoretical limits of extreme elasticity.

• 저널Manufacturing & Service Operations Management
• 토픽Supply Chain and Inventory Management · Management Information Systems
• DOI10.1287/msom.2026.0118
• 저자Ruiting Zuo, Tinglong Dai, Jussi Keppo