(Georgia Institute of Technology, 2005-12-15)
Ferguson, Mark E.; Koenigsberg, Oded
Firms selling goods whose quality level deteriorates over time often face difficult
decisions when unsold inventory remains. Since the leftover product is often perceived
to be of lower quality than the new product, carrying it over offers the firm a second
selling opportunity and an ability to price discriminate. By doing so, however, the firm
subjects sales of its new product to competition from the leftover product. We present
a two period model that captures the effect of this competition on the firm’s production
and pricing decisions. We characterize the firm’s optimal strategy and find conditions
under which the firm is better off carrying all, some, or none of its leftover inventory.
We also show that, compared to a firm that acts myopically in the first period, a firm
that takes into account the effect of first period decisions on second period profits will
price its new product higher and stock more of it in the first period. Thus, the benefit
of having a second selling opportunity dominates the detrimental effect of cannibalizing
sales of the second period new product.
(Georgia Institute of Technology, 2005-06-12)
Ferguson, Mark E.; Koenigsberg, Oded
Firms selling goods whose quality level deteriorates over time often face difficult
decisions when unsold inventory remains. Since the leftover product is often perceived
to be of lower quality than the new product, carrying it over offers the firm a second
selling opportunity, but at a reduced price. By doing so, however, the firm subjects sales
of its new product to competition from the leftover product. We present a dynamic
model that captures the effect of this competition on the firm's production and pricing
decisions. We characterize the firm's optimal strategy and find conditions under which
the firm is better off carrying all, some, or none of its leftover inventory. We also show
that the price of the new product is independent of the quality level of the leftover
product.
(Georgia Institute of Technology, 2004-09-14)
Ferguson, Mark E.; Koenigsberg, Oded
Firms selling goods whose quality level deteriorates over time often face difficult
decisions when unsold inventory remains. Since the leftover product is often perceived
to be of lower quality than the new product, carrying it over to the next period offers
the firm a second selling opportunity, but at a reduced price. By doing so, however, the firm subjects sales of its new product to competition from the leftover product. We present a dynamic model that captures the effect of this competition on the firm's production and pricing decisions. We characterize the firm's optimal strategy and find conditions under which the firm is better of carrying all, some, or none of its
leftover inventory to the next period. We also show that the price of the new product
is independent of the quality level of the leftover product. Finally, we relax the model
assumption and assume that there is demand uncertainty in both periods. We run a
simulation and find that the firm finds it optimal to introduce the old units only if the
level of uncertainty is low and does not exceed a certain threshold.