A two-product newsvendor system with a flexible product

Qi Fu, Qifei Wang, Xiaoya Xu and Zhaotong Lian

International Journal of Production Economics, 2017, vol. 193, issue C, 590-601

Abstract: In this paper, we investigate the effect of offering a flexible product in a newsvendor system with two products. We show that this flexible selling strategy can help firms effectively pool excess stocks to better match supply with demand and thus enhance profitability. However, offering a flexible product may also bring the potential risk of cannibalizing regular demand. We explore this trade-off by incorporating pricing decision for the flexible product when demand cannibalization exists. Our study shows that even when there is no demand induction effect, offering a flexible product still significantly improves profit. The value of offering a flexible product is highest when prices for specific products are the same, and it increases when the demands for specific products are more negatively correlated, more volatile, and more symmetric. Furthermore, the performance improvement is more salient when products have narrow profit margin or high overage risk.

Keywords: Flexible products; Newsvendor system; Operations management; Quantitative methods; Optimization (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:193:y:2017:i:c:p:590-601

DOI: 10.1016/j.ijpe.2017.08.018

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