Dynamic Bayesian quantity control when some customers will accept a substitute

This is an extended abstract of a paper that was a finalist in the Manufacturing and Service Operations Management Society's 2003 Student Paper Competition. When a desired product is unavailable, a customer may accept a substitute, or not make a purchase. In revenue management or inventory management, the probability of a substitutionary problem is of crucial importance. This paper explores the managerial implications of simultaneous quality control and estimation of the unknown substitution probability by means of two simple models.