PROFITABILITY ANALYSIS OF FREE UPGRADE POLICY

Jishan Zhu ()
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Jishan Zhu: School of Business, Long Island University, Brooklyn, NY 11201, USA

International Journal of Information Technology & Decision Making (IJITDM), 2008, vol. 07, issue 02, 217-224

Abstract: We consider a firm selling two similar products with different prices. When the lower-priced product is out of stock, the firm supplies the customer a higher-priced product with the lower-priced product price. The policy is called free upgrade. In this paper, we study the profitability of such policy. We formulate the problem as a two-product newsvendor problem, and prove that the firm achieves more profit with the free upgrade policy. We propose a simulation algorithm to find the solution and demonstrate our findings with some numerical examples.

Keywords: Inventory; optimization; newsvendor problem; simulation (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijitdm:v:07:y:2008:i:02:n:s0219622008002910

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DOI: 10.1142/S0219622008002910

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