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Evaluating the potential effects from probabilistic selling of similar products

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  • Yongbo Xiao
  • Jian Chen

Abstract

In this article, we consider an online retailer who sells two similar products (A and B) over a finite selling period. Any stock left at the end of the period has no value (like clothes going out of fashion at the end of a season). Aside from selling the products at regular prices, he may offer an additional option that sells a probabilistic good, “A or B,” at a discounted price. Whenever a customer buys a probabilistic good, he needs to assign one of the products for the fulfillment. Considering the choice behavior of potential customers, we model the problem using continuous‐time, discrete‐state, finite‐horizon dynamic programming. We study the optimal admission decisions and devise two scenarios, whose value functions can be used as benchmarks to evaluate the demand induction effect and demand dilution effect of probabilistic selling (PS). We further investigate an extension of the base MDP (Markov Decision Process) model in which the fulfillment of probabilistic sales is uncontrollable by the retailer. A special case of the extended model can be used as a benchmark to quantify the potential inventory pooling effect of PS. Finally, numerical experiments are conducted to evaluate the overall profit improvement, and the effects from adopting the PS strategy. © 2014 Wiley Periodicals, Inc. Naval Research Logistics, 61: 604–620, 2014

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  • Yongbo Xiao & Jian Chen, 2014. "Evaluating the potential effects from probabilistic selling of similar products," Naval Research Logistics (NRL), John Wiley & Sons, vol. 61(8), pages 604-620, December.
    • Handle: RePEc:wly:navres:v:61:y:2014:i:8:p:604-620
    DOI: 10.1002/nav.21606
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    1. Guang Yang & Ying Wang & Mulin Liu, 2023. "Optimal Policy for Probabilistic Selling with Three-Way Revenue Sharing Contract under the Perspective of Sustainable Supply Chain," Sustainability, MDPI, vol. 15(4), pages 1-22, February.
    2. Yeu-Shiang Huang & Tzu-Yi Wu & Chih-Chiang Fang & Tzu-Liang (Bill) Tseng, 2021. "Decisions on Probabilistic Selling for Consumers with Different Risk Attitudes," Decision Analysis, INFORMS, vol. 18(2), pages 121-138, June.
    3. Yifan Wu & Shibo Jin, 2022. "Joint pricing and inventory decision under a probabilistic selling strategy," Operational Research, Springer, vol. 22(2), pages 1209-1233, April.
    4. Ningyuan Chen & Adam N. Elmachtoub & Michael L. Hamilton & Xiao Lei, 2021. "Loot Box Pricing and Design," Management Science, INFORMS, vol. 67(8), pages 4809-4825, August.
    5. Adam N. Elmachtoub & Michael L. Hamilton, 2021. "The Power of Opaque Products in Pricing," Management Science, INFORMS, vol. 67(8), pages 4686-4702, August.
    6. Xufeng Yang & Juliang Zhang & Wen Jiao & Hong Yan, 2023. "Optimal Capacity Rationing Policy for a Container Leasing System with Multiple Kinds of Customers and Substitutable Containers," Management Science, INFORMS, vol. 69(3), pages 1468-1485, March.
    7. Wen, Xin & Choi, Tsan-Ming & Chung, Sai-Ho, 2019. "Fashion retail supply chain management: A review of operational models," International Journal of Production Economics, Elsevier, vol. 207(C), pages 34-55.
    8. Guo, Xiaolong & Bian, Junsong & Wu, Peiyan & Shi, Victor & Chen, Huangen, 2023. "Probabilistic product design with regret-anticipated consumers," International Journal of Production Economics, Elsevier, vol. 263(C).

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