One-Way Substitution Newsboy Problem under Retailer’s Budget Constraint

Abstract EN

One-way substitution means that when low-end brand goods are sold out, high-end brand goods can be offered to consumers as substitute goods, but not the opposite.

In realistic economic activity, “shortage of funds” is a common practical problem for the retailer in making order decision.

This paper proposes a nonlinear optimization model with the retailer’s budget to study the optimal order quantities and substitution discount for two one-way substitution products under a stochastic demand scenario, and the objective is to maximize the retailer’s revenue.

We solve the model mainly according to the Karush–Kuhn–Tucker (KKT) theorem and present the conditions of optimal decisions.

Finally, through the numerical study, we analyze the influence of the budget constraint and other parameters on the optimal solutions.