An optimal inventory management problem with reputation-dependent demand

The paper addresses a problem of inventory control in a two-echelon retailer-customer setting. The problem incorporates the reputation of the retailer as a key factor influencing its policy. The retailer’s reputation depends on the degree to which past demand was satisfied. In turn, the reputation impacts the distribution of future demand. The optimality conditions developed by means of a perturbation analysis technique enable an optimal base-stock policy, in which the current level of base-stock depends on the retailer’s current reputation.