A 2-ITEM NEWSBOY PROBLEM WITH SUBSTITUTABILITY

Previous research on the newsboy problem is based on the assumption th at in case of a shortage, unsatisfied demand is lost. Such an assumpti on is inappropriate for items that have a close substitute. In this pa per, we formulate a two-item newsboy problem with substitutability (TI NPS). Upper and lower bounds on the optimal order quantities of the tw o items are derived. Since analytical solutions to the problem are dif ficult to obtain, a Monte Carlo simulation is used to identify the opt imal solution to the TINPS. Order quantities identified by the simulat ion provide higher expected profit than would have been obtainable wit hout considering substitutability.