The effect of demand uncertainty in a price-setting newsvendor model
AbstractWe study the effects of demand uncertainty on optimal decisions and the expected profit of a price-setting newsvendor who faces either additive or multiplicative stochastic demand. Our key findings are as follows. (1) A stochastically larger demand may even lead to a smaller order size and a lower profit when price is endogenous. (2) A stochastically larger demand will lead to a higher selling price in general for the additive demand case but to a lower selling price under certain mild conditions for the multiplicative demand case. Moreover, if the larger demand can be represented by a transformation of the lower one, it will lead to a higher expected profit for both demand cases. However, except for the setting with a zero shortage cost, a larger demand may not necessarily result in a higher expected profit in general. (3) Under mild conditions, a less variable demand will lead to a higher and lower selling price for the additive and multiplicative demand case, respectively, and a higher expected profit for both cases.
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Bibliographic InfoArticle provided by Elsevier in its journal European Journal of Operational Research.
Volume (Year): 207 (2010)
Issue (Month): 2 (December)
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Web page: http://www.elsevier.com/locate/eor
Newsvendor Pricing Demand uncertainty Stochastic comparison;
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