A two-product newsvendor system with a flexible product

In this paper, we investigate the effect of offering a flexible product in a newsvendor system with two products. We show that this flexible selling strategy can help firms effectively pool excess stocks to better match supply with demand and thus enhance profitability. However, offering a flexible product may also bring the potential risk of cannibalizing regular demand. We explore this trade-off by incorporating pricing decision for the flexible product when demand cannibalization exists. Our study shows that even when there is no demand induction effect, offering a flexible product still significantly improves profit. The value of offering a flexible product is highest when prices for specific products are the same, and it increases when the demands for specific products are more negatively correlated, more volatile, and more symmetric. Furthermore, the performance improvement is more salient when products have narrow profit margin or high overage risk.