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Profitability Analysis Of Free Upgrade Policy

Author

Listed:
  • JISHAN ZHU

    (School of Business, Long Island University, Brooklyn, NY 11201, USA)

Abstract

We consider a firm selling two similar products with different prices. When the lower-priced product is out of stock, the firm supplies the customer a higher-priced product with the lower-priced product price. The policy is called free upgrade. In this paper, we study the profitability of such policy. We formulate the problem as a two-product newsvendor problem, and prove that the firm achieves more profit with the free upgrade policy. We propose a simulation algorithm to find the solution and demonstrate our findings with some numerical examples.

Suggested Citation

  • Jishan Zhu, 2008. "Profitability Analysis Of Free Upgrade Policy," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 217-224.
    • Handle: RePEc:wsi:ijitdm:v:07:y:2008:i:02:n:s0219622008002910
    DOI: 10.1142/S0219622008002910
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