Estimating Demand with Constrained Data and Product Substitutions

The inventory and revenue management models most commonly taught in the operations management and industrial engineering disciplines typically assume that the demand for a product is easily estimated and is independent of competing products offered through the same channel. In this chapter, we show why this is rarely a good assumption and provide a review of the statistical techniques that have been developed to correct product demand distribution estimates that are biased due to truncated demand or product substitution effects. Failure to correct product demand estimates for these biases have been shown to result in significant missed opportunities in meeting customers’ true demand due to incorrectly calculated optimal product stocking levels