Abstract
We consider a network revenue management model with derivative products that share properties of flexible and callable products. A derivative product gives the seller the option to recall a sold unit and replace it with an alternative from a pre-specified set – this set can include substitute products and/or cash compensation. We model demand by a Nested Logit model where each derivative product and its associated specific product are included in the same nest because they are correlated. We propose a heuristic control policy and present computational experiments that show that it is near-optimal and significantly increase expected revenue relative to offering only specific products, even with a high penalty for reassignment and an early exercise constraint.