The effect of large order quantities on expected profit in the single-period model

The classical assumption in the single-period model is that excess inventory is discounted and sold at the end of the period. However, the effects of large order quantities which may result in excess inventory remaining until the discount stage on the following period's demand is not considered. For many products, such as ski equipment and clothing, customers buying large quantities of these products at the discount stage may reduce their demand for the same type of product in the next period. Thus, having large amount of inventory to discount at the end of the period may lead to a reduction in next period's demand and therefore may reduce profit. This paper investigates the effect of large order quantities on expected profit in the single-period model. The paper also provides an algorithm for identifying the new optimal order quantity for the problem under explicit consideration of the spillover effect of over estimating demand.