An optimization model for products with limited production quantity

An important strategy for dealing with scarcity and customer response is to produce limited quantity of certain products. Due to limited production quantity, consumers would feel the value or uniqueness of the products and have a stronger urgency to purchase them. Some distribution outlet would raise prices to cover promotion expenses and to increase profit margin. In this study, we consider a newsvendor problem for products with limited production quantity: both the unit selling price and customers' demand are influenced by the limited production quantity. An algorithm is developed to obtain a production policy such that the expected profit is maximized. Numerical examples and sensitivity analysis are presented to illustrate the model.