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The optimal production and sales policy for a new product with negative word-of-mouth

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  • In this paper, we consider a firm which maximizes its profit by determining the production and sales policies for a new product during the lifetime of the product. Because of capacity constraint, we extend Bass demand process a more general case including the negative effectiveness of word-of-mouth. We analyze the production and sales policies in two cases: strong negative word-of-mouth and weak negative word-of-mouth. In the case of strong negative word-of-mouth, we show that myopic policy is optimal under some mild conditions. In the case of weak negative word-of-mouth, we show that build-up policy is optimal in a special case of negligible holding cost and discount rate. However, for positive holding cost and discount rate, we compare myopic policy with build-up policy by numerical examples, and show that the build-up policy is no longer a robust approximation to the optimal policy.
    Mathematics Subject Classification: 90B30; 90B60.


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