Analysis of monitoring and limiting of commercial cheating: A newsvendor model

Commercial cheating, that is, counterfeit products and lower quality products sold as genuine products, exists extensively in many countries of the world, especially in the developing countries. In this paper, we investigate the phenomena of commercial cheating, study the optimal cheating actions of inventory managers under a monitoring and limiting regime from the industrial administration office (IAO for short) and demonstrate the efficiency of monitoring and limiting such cheating activities. A newsvendor model has been considered for the inventory manager to order different quality products with different set-up costs. The model, a kind of extension of the general newsvendor problem, is viewed as a shocked inventory model. We analyse some properties of the optimal cheating policies from the point of view of an inventory manager, and investigate the effectiveness of both the punishment level and the checking rate. © 2005 Operational Research Society Ltd. All rights reserved.