A pricing model for clearing end-of-season retail inventory Diwakar Gupta a , Arthur V. Hill b, * , Tatiana Bouzdine-Chameeva c a Department of Mechanical Engineering, Graduate Program in Industrial Engineering, University of Minnesota, 111 Church Street, SE Minneapolis, MN 55455, USA b Operations and Management Science Department, Curtis L. Carlson School of Management, University of Minnesota, 321 19th Avenue South, Room 3-150, Minneapolis, MN 55455-0413, USA c Department of Information, Decision and Management, Bordeaux Business School, 680 cours de la Liberation Talence 33405, France Received 2 September 2003; accepted 15 July 2004 Available online 29 September 2004 Abstract The problem of setting prices for clearing retail inventories of fashion goods is a difficult task that is further exac- erbated by the fact that markdowns enacted near the end of the selling season have a smaller impact on demand. In this article, we present discrete-time models for setting clearance prices in such an environment. When demand is determin- istic, we compute optimal prices and show that decreasing reservation prices lead to declining optimal prices. When demand is stochastic and arbitrarily correlated across planning periods, we obtain bounds on the optimal expected rev- enue and on optimal prices. We also develop a heuristic procedure for finding near-optimal prices and test its accuracy through numerical experiments. These experiments reveal new insights for practitioners. For example, the penalty for choosing clearance price once and keeping it unchanged for the remainder of the selling season is found to be small when either the mean reservation prices do not change appreciably over time or when they drop sharply after the first period. Ó 2004 Elsevier B.V. All rights reserved. Keywords: Retailing; Inventory; Pricing 1. Introduction With the rapid proliferation of retail SKUs (stock-keeping units), mitigating market mediation costs in the retail of fashion goods has become increasingly important for profitability of retailers. When facing 0377-2217/$ - see front matter Ó 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.ejor.2004.07.048 * Corresponding author. Tel.: +1 952 942 5690/+1 612 624 4015; fax: +1 612 624 8804. E-mail address: ahill@csom.umn.edu (A.V. Hill). European Journal of Operational Research 170 (2006) 518–540 www.elsevier.com/locate/ejor