Optimal shelf-space stocking policy using stochastic dominance under supply-driven demand uncertainty

Abstract

In this paper, we develop an optimal shelf-space stocking policy when demand, in addition to the exogenous uncertainty, is influenced by the amount of inventory displayed (supply) on the shelves. Our model exploits stochastic dominance condition; and, we assume that the distribution of realized demand with higher stocking level stochastically dominates the distribution of realized demand with lower stocking level. We show that the critical fractile with endogenous demand may not exceed the critical fractile of the classical newsvendor model. Our computational results validate the optimality of amount of units stocked on the retail shelves. � 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved.