Optimal Pricing and Inventory Planning with Charitable Donations

Abstract

This paper investigates firms' optimal operational decisions and after-tax profits with regard to tax deduction for charitable donations. Motivated by the steady growth in non-cash donations from U.S. companies, our work is the first to provide theoretical guidance on operational planning under tax deduction for both pre-committed donations and end-of-season donations. We analyze the impact of tax deduction for a profitdriven firm under a two-period price-markdown newsvendor model and characterize the firm's optimal price and quantity decisions. The firm's optimal donation behavior is driven by two factors: fixed cost and demand uncertainty. Specifically, a positive fixed cost can induce pre-committed donation during the regular selling season, and demand uncertainty can induce end-of-season donation during the clearance period. The enhanced tax deduction that is designed to encourage charitable donations results in unexpected behavior by the firm. For example, the firm's optimal clearance price can increase with the amount of leftover inventory, and the firm's optimal after-tax profit can increase as the tax rate increases. While the value of the deduction is tied to the fair market value (and the price) of the product, surprisingly, the firm may find it more profitable to charge a lower price, because the lower price may scale up the demand uncertainty and consequently increase the expected tax subsidy under the enhanced tax deduction. Our analysis reveals important insights about the impact of the tax law on a monopolist's optimal operational decisions and profit.

Sustainable Operations Management Through the Perspective of Manufacturing & Service Operations Management

“…One example is responsible sourcing-for example, supplier selection (Liu et al 2019), incentive mechanisms adopted by buyers (Plambeck andTaylor 2016, Caro et al 2018), and how social responsibility practices impact consumer valuations (Kraft et al 2018). These topics also include agricultural operations (de Zegher et al 2019, Liao et al 2019, serving underserved populations (Chu et al 2018, Yu et al 2018, and enhancing the effectiveness of nongovernmental organizations and nonprofit organizations (Privett andErhun 2011, Kraft et al 2013).…”

Joint Pricing and Ordering Problem with Charitable Donations

“…The authors do not consider pricing in their model and assume exogenous prices. Another research paper on the operational planning of charitable donations is that of Chu et al [27]. The paper analyzes the impact of tax deductions arising from donations for a profit-maximizing firm.…”

The Manufacturer Decision Analysis for Corporate Social Responsibility under Government Subsidy

“…Lev et al [34] demonstrate that charitable donation has a positive impact on sales growth based on an empirical research of America. Chu et al [35] investigate the tax deduction for charitable donation and after-tax profits and find that consumers would like to pay a premium for charitable donation, which increases the firm's profit. On the other hand, the charitable donation approach obtains tangible profits and intangible benefits from the government.…”