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The effect of demand uncertainty in a price-setting newsvendor model

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  • Xu, Minghui
  • Chen, Youhua (Frank)
  • Xu, Xiaolin
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    Abstract

    We 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 Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 207 (2010)
    Issue (Month): 2 (December)
    Pages: 946-957

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    Handle: RePEc:eee:ejores:v:207:y:2010:i:2:p:946-957

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Newsvendor Pricing Demand uncertainty Stochastic comparison;

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    Cited by:
    1. Arcelus, F.J. & Kumar, Satyendra & Srinivasan, G., 2012. "Risk tolerance and a retailer's pricing and ordering policies within a newsvendor framework," Omega, Elsevier, vol. 40(2), pages 188-198, April.
    2. Brito, Anderson J. & de Almeida, Adiel T., 2012. "Modeling a multi-attribute utility newsvendor with partial backlogging," European Journal of Operational Research, Elsevier, vol. 220(3), pages 820-830.
    3. Xu, Minghui & Lu, Ye, 2013. "The effect of supply uncertainty in price-setting newsvendor models," European Journal of Operational Research, Elsevier, vol. 227(3), pages 423-433.
    4. Chen, Yun Chu & Fang, Shu-Cherng & Wen, Ue-Pyng, 2013. "Pricing policies for substitutable products in a supply chain with Internet and traditional channels," European Journal of Operational Research, Elsevier, vol. 224(3), pages 542-551.
    5. Sandal, Leif K. & Ub√łe, Jan, 2012. "Stackelberg equilibria in a multiperiod vertical contracting model with uncertain and price-dependent demand," Discussion Papers 2012/2, Department of Business and Management Science, Norwegian School of Economics.
    6. Jammernegg, Werner & Kischka, Peter, 2013. "The price-setting newsvendor with service and loss constraints," Omega, Elsevier, vol. 41(2), pages 326-335.
    7. Arcelus, F.J. & Kumar, Satyendra & Srinivasan, G., 2012. "The effectiveness of manufacturer vs. retailer rebates within a newsvendor framework," European Journal of Operational Research, Elsevier, vol. 219(2), pages 252-263.
    8. Colombo, Luca & Labrecciosa, Paola, 2012. "A note on pricing with risk aversion," European Journal of Operational Research, Elsevier, vol. 216(1), pages 252-254.

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