In this paper, we study the optimal inventory levels of two vertically differentiated products under centralized and competitive settings using a general consumer choice model. Under the assumptions that consumers are heterogeneous and are willing to substitute with the other product if their preferred product is out of stock, we develop an inventory model under base stock substitution when the number of consumers is stochastic. Closed-form analytical solutions of the optimal inventory level are derived. We found that in comparison to a competitive setting, a centralized retailer stocks a lower level of inventory from the product that runs out of stock first and a higher level of inventory from the product that runs out second.
|Number of pages
|Published - Sep 2019
|9th IFAC Conference on Manufacturing Modelling, Management and Control, MIM 2019 - Berlin, Germany
Duration: 28 Aug 2019 → 30 Aug 2019
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- Game theory
- Stock-out substitution
- Two-dimensional consumer-choice