TY - JOUR
T1 - Which strategy is better for managing multi-product demand uncertainty
T2 - Inventory substitution or probabilistic selling?
AU - Zhang, Juliang
AU - Deng, Lan
AU - Liu, Huimin
AU - Cheng, T. C.E.
N1 - Funding Information:
We thank the Editor and two anonymous referees for their many helpful comments on an earlier version of our paper. This work was supported in part by the National Natural Science Foundation of China under grant numbers 72171016 , 71661167009 ; NSFC/RGC joint support scheme under grant number 3-RAA7 ; and the Beijing Logistics Informatics Research Base. Cheng was also supported in part by The Hong Kong Polytechnic University under the Fung Yiu King-Wing Hang Bank Endowed Professorship in Business Administration.
Publisher Copyright:
© 2021 Elsevier B.V.
PY - 2021
Y1 - 2021
N2 - Firms generally sell multiple products whose demands are uncertain. In order to manage product demand uncertainty, some firms use inventory substitution, while others use probabilistic selling. Which strategy should firms adopt is an intriguing issue. Addressing this issue, we consider a retailer that sells two substitutable products whose demands are uncertain. Based on the newsboy model, we analyze the optimal pricing and inventory decisions under the two strategies in three total market size situations, namely deterministic, discrete random, and general random. We derive closed-form optimal solutions for the former two situations and numerically find the optimal solution for the latter situation. We then compare the optimal profits under the two strategies in the three situations. We show that probabilistic selling always performs better than inventory substitution and brings more benefits to the retailer. These findings can explain that more and more firms adopt probabilistic selling in reality.
AB - Firms generally sell multiple products whose demands are uncertain. In order to manage product demand uncertainty, some firms use inventory substitution, while others use probabilistic selling. Which strategy should firms adopt is an intriguing issue. Addressing this issue, we consider a retailer that sells two substitutable products whose demands are uncertain. Based on the newsboy model, we analyze the optimal pricing and inventory decisions under the two strategies in three total market size situations, namely deterministic, discrete random, and general random. We derive closed-form optimal solutions for the former two situations and numerically find the optimal solution for the latter situation. We then compare the optimal profits under the two strategies in the three situations. We show that probabilistic selling always performs better than inventory substitution and brings more benefits to the retailer. These findings can explain that more and more firms adopt probabilistic selling in reality.
KW - Inventory substitution
KW - Newsboy model
KW - Pricing
KW - Probabilistic selling
KW - Supply chain management
UR - http://www.scopus.com/inward/record.url?scp=85121982692&partnerID=8YFLogxK
U2 - 10.1016/j.ejor.2021.11.055
DO - 10.1016/j.ejor.2021.11.055
M3 - Journal article
AN - SCOPUS:85121982692
SN - 0377-2217
JO - European Journal of Operational Research
JF - European Journal of Operational Research
ER -