Inventory Decisions for the Price Setting Retailer: Extensions to the EOQ Setting

Abstract

Practical inventory settings often include multiple generations of the same product on hand. New products often arrive before old stock is exhausted, but most inventory models do not account for this. Such a setting gives rise to the possibility of inter-generational substitution between products. We study a retailer that stocks two product generations and we show that from a cost perspective the retailer is better off stocking only one generation. We proceed with a profit scheme and develop a price-setting profit maximization model, proving that in one and two generation profit models there exists a unique solution. We use the profit model to show that there are cases where it is more profitable to stock two generations. We discuss utility and preference extensions to the profit model and present the general n-product case.