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A standard problem in operations literature is optimal stocking of substitutable products. We consider a consumer-driven substitution problem with an arbitrary number of products under both centralized inventory management and competition. Substitution is modeled by letting the unsatisfied demand for a product flow to other products in deterministic proportions. We obtain analytically tractable solutions that facilitate comparisons between centralized and competitive inventory management under substitution. For the centralized problem we show that, when demand is multivariate normal, the total profit is decreasing in demand correlation.
Inventory/production, stochastic, multiproduct: substitution, Games/group decisions, noncooperative: Nash equilibrium
Netessine, S., & Rudi, N. (2003). Centralized and Competitive Inventory Models With Demand Substitution. Operations Research, 51 (2), 329-335. http://dx.doi.org/10.1287/opre.51.2.329.12788
Date Posted: 27 November 2017
This document has been peer reviewed.