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

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. 1. Introduction With respect to a newsvendor-type item, introducing a series of its homogeneous items one after another is getting an overwhelming predominant edge in the competitive markets. A variety of items, such as a series of smartphones of iPhone, Galaxy, and hTC, are among the illustrations. And obviously, its main purpose is to draw more potential buyers as well as to strive for better market shares. Meanwhile, as we have observed from the markets, a strategy of shortage-making toward a prior item is usually deliberately created to motivate demand on its following homogeneous items. All together extends a classical single-period newsvendor setting to a multiperiod one with implementations of a shortage strategy in prior period, and a product extension in upcoming period is beginning to mushroom in modern marketing approaches. For any newsvendor item, referring to Arcelus et al. [1], its stochastic demand could be in a linear-additive pattern consisting of a deterministic demand and an error demand, where the deterministic demand is composed of a primary demand and a consumer price elasticity. In practice, amounts of the primary demand of an item could be predicted by virtue of observation, surveys, or experimentation from the markets; and its size, according to practical experiences, mostly depends on its company goodwill, product quality, product applicability, and the degree of customer acceptance.