Table of Contents
ISRN Operations Research
Volume 2013, Article ID 918145, 4 pages
http://dx.doi.org/10.1155/2013/918145
Research Article

A Two-Period Newsvendor Model with Product Extension and Shortage-Making Strategy

1Department of Business Administration, Takming University of Science and Technology, No. 56, Section 1, Huanshan Road, Neihu District, Taipei 11451, Taiwan
2Department of International Trade, Takming University of Science and Technology, No. 56, Section 1, Huanshan Road, Neihu District, Taipei 11451, Taiwan

Received 25 April 2013; Accepted 17 June 2013

Academic Editors: C. Mohan, L. Tadj, and X.-M. Yuan

Copyright © 2013 Kuo-Hsien Wang et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This study deals with a two-period newsvendor setting in which the item in the second period is a product extension of the item in the first period. A shortage strategy toward the first item is intentionally made so as to stimulate more sales amounts of the second item. The stochastic demand of these two items is assumed to be a linear-additive pattern comprising a deterministic demand and an error demand, where the deterministic demand consists of a primary demand and a consumer price elasticity, and the error demand is hypothesized to be exponentially distributed. The objective of this study is to optimize system's overall expected profit by jointly determining the optimal order quantities and selling prices of these two items. We first compare our proposed model with the classical newsvendor model in light of profit performances, and it reveals that a higher shifting demand rate makes our model a more profitable setting. Impact on profit performances caused by an increasing primary demand of the second item is then demonstrated by numerical examples that an unthought-of ripple effect of an increasing error demand of the second item also occurs.