Dynamic Markdown Strategies for Perishable Products: Waste Reduction versus Profitability

Abstract

Freshness is a key attribute of perishable goods, particularly in the food sector, and strongly influences consumer purchasing behavior. Retailers often prioritize high freshness to remain competitive, yet maintaining this standard under demand uncertainty increases the likelihood of unsold inventory and waste. Retailers use markdowns to mitigate this risk, but the timing and depth of discounts must be carefully coordinated to avoid lost revenue or excess waste. This paper studies how retailers can jointly optimize order and markdown pricing decisions to balance profitability and waste reduction for perishable products within an integrated decision-making framework. The joint ordering-markdown pricing problem is formulated as a stochastic dynamic programming model that accounts for the demand cannibalization between regular price and markdown sales. The conflicting objectives of profit maximization and waste reduction are captured through a weighted objective function that reflects the retailer's trade-off preferences. To manage the complexity of the model, we propose an efficient solution approach and conduct numerical experiments to assess the performance of alternative markdown policies. Our results show that implementing multiple early price reductions with successive price reductions can simultaneously increase revenue and reduce waste. Our findings generate several key managerial insights: (i) firms can tailor their markdown policies according to their strategic priorities of profit maximization, waste reduction, or a balanced combination of both, (ii) early and well-timed markdowns based on available inventory levels allow firms to simultaneously attract quality-seeking customers and price-sensitive segments, (iii) implementing a second or multiple markdowns can further reduce waste while also increasing revenue.