Centralized and Competitive Inventory Models with Demand Substitution

Serguei Netessine; Nils Rudi

doi:10.1287/opre.51.2.329.12788

Centralized and Competitive Inventory Models with Demand Substitution

¹ The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104 · ² W. E. Simon Graduate School of Business, University of Rochester, Rochester, New York 14627

Operations Research 2003

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.

DOI: 10.1287/opre.51.2.329.12788
Volume: 51 (2)
Pages: 329-335
Language: en
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