Simulating the demand reshaping and substitution effects of probabilistic selling

Abstract

This paper addresses the effect of probabilistic selling on inventory decisions and the expected profit through demand reshape and demand substitution. By considering a scenario with two higher-priced specific products and one lower-priced probabilistic product, we construct a new newsboy-type inventory model with demand reshape and substitution. A simulation study is implemented to explore extensively the effects of demand uncertainty, demand correlation, price sensitivity and price discount on the inventory decisions and profitability of probabilistic selling. Finally, we provide insightful managerial implications of the nature of inventory management mechanism of probabilistic selling.