An EOQ model with deteriorating items and self-selection constraints (Q2192997)

This paper is analytically a synthesis of a model proposed by \textit{K. S. Moorthy} and \textit{I. P. L. Png} [``Market segmentation, cannibalization, and the timing of product introductions'', Manag. Sci. 38, No. 3, 345--359 (1992; \url{doi:10.1287/mnsc.38.3.345})] and of a hypothesis elaborated by \textit{O. Fujiwara} and \textit{U. L. J. S. R. Perera} [Eur. J. Oper. Res. 70, No. 1, 104--114 (1993; Zbl 0783.90031)] as follows. The basic scenario involves at first a retailer that faces a market with two customer segments. Customers in one segment value quality more. Hence, the retailer can offer a high quality item with high prices to these customers. On the contrary, customers in the other segment do not value quality as much. Thus, the retailer is offering a lower quality item to these customers at lower prices. But, now, contrary to Moorthy and Png [loc. cit.], the qualities of items offered to two customer segments are assumed to be inputs rather than decision variables; and these items are also assumed to deteriorate (lose quality) linearly over time. However, if the items deteriorate with different rates, the item that deteriorates slower can become attractive to both customer segments in time, unless a price adjustment is made. That is, an item can substitute the other in time, and cannibalization may occur. The retailer has to decide on the replenishment interval, the prices, and when to adjust prices. Given this analytical framework, this paper follows next Fujiwara and Perera [loc. cit.] in assuming linear holding costs for items that lose their quality linearly, and exponential holding costs for items that deteriorate exponentially in time. This allows an ``economic order quantity'' (EOQ) treatment of the issue in hand, a la Fujiwara and Perera [loc. cit.]. The decrease in quality is accompanied by a reduction in the value of the item perceived by the consumers. The article proposes algorithms to solve two possible cases: (i) The two items are not much different in terms of quality; and (ii) The two customer types are similar in terms of the perception of quality. Sensitivity analysis suggests that the effects on prices and order frequencies become more severe in these cases.