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Optimal inventory policies for substitutable commodities with stochastic demand

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  • Barry A. Pasternack
  • Zvi Drezner

Abstract

In this article we consider a stochastic model for two products which have a single‐period inventory structure and which can be used as substitutes for each other should the need arise. Substitution will occur with probability one, but at perhaps a different revenue level. We prove that the expected profit function is concave, allowing us to find optimal stocking levels for the two products. We compare optimum inventory levels for the case of single substitution with that where there is no substitution. It is demonstrated for the case of single substitution that total optimum order quantities can actually increase or decrease with the substitution revenue.

Suggested Citation

  • Barry A. Pasternack & Zvi Drezner, 1991. "Optimal inventory policies for substitutable commodities with stochastic demand," Naval Research Logistics (NRL), John Wiley & Sons, vol. 38(2), pages 221-240, April.
  • Handle: RePEc:wly:navres:v:38:y:1991:i:2:p:221-240
    DOI: 10.1002/1520-6750(199104)38:23.0.CO;2-7
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    References listed on IDEAS

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    1. Bryan L. Deuermeyer, 1980. "A single period model for a multiproduct perishable inventory system with economic substitution," Naval Research Logistics Quarterly, John Wiley & Sons, vol. 27(2), pages 177-185, June.
    2. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
    3. Mahmut Parlar, 1988. "Game theoretic analysis of the substitutable product inventory problem with random demands," Naval Research Logistics (NRL), John Wiley & Sons, vol. 35(3), pages 397-409, June.
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