How Should a Firm Manage Deteriorating
Inventory? (ed.2)
Author(s)
Ferguson, Mark E.
Koenigsberg, Oded
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Abstract
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.
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Date
2005-06-12
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Text
Resource Subtype
Working Paper