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The effect of advertising on the distribution-free newsboy problem

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  • Lee, Chih-Ming
  • Hsu, Shu-Lu
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    Abstract

    Advertising is very important for the newsboy problem because the shelf-life of the newsboy product is short and advertising may increase sales to avoid overstocking. In this paper, models to study the effect of advertising are developed for the distribution-free newsboy problem where only the mean and variance of the demand are known. As in Khouja and Robbins (2003), it is assumed that the mean demand is an increasing and concave function of advertising expenditure. Three cases are considered: (1) demand has constant variance, (2) demand has constant coefficient of variation, and (3) demand has an increasing coefficient of variation. This paper provides closed-form solutions or steps to solve the problem. Numerical results of the model are also compared with those from other papers. The effects of model parameters on optimal expenditure on advertising, optimal order quantity, and the lower bound on expected profit are derived or discussed.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Production Economics.

    Volume (Year): 129 (2011)
    Issue (Month): 1 (January)
    Pages: 217-224

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    Handle: RePEc:eee:proeco:v:129:y:2011:i:1:p:217-224

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

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    Keywords: Newsboy problems Advertising Distribution-free.;

    References

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    1. Vijay Mahajan & Eitan Muller, 1986. "Advertising Pulsing Policies for Generating Awareness for New Products," Marketing Science, INFORMS, INFORMS, vol. 5(2), pages 89-106.
    2. Wang, Charles X., 2010. "The loss-averse newsvendor game," International Journal of Production Economics, Elsevier, Elsevier, vol. 124(2), pages 448-452, April.
    3. Vijay Mahajan & Eitan Muller, 1986. "Reply—Reflections on Advertising Pulsing Policies for Generating Awareness for New Products," Marketing Science, INFORMS, INFORMS, vol. 5(2), pages 110-111.
    4. Khouja, Moutaz, 1999. "The single-period (news-vendor) problem: literature review and suggestions for future research," Omega, Elsevier, vol. 27(5), pages 537-553, October.
    5. Mostard, Julien & de Koster, Rene & Teunter, Ruud, 2005. "The distribution-free newsboy problem with resalable returns," International Journal of Production Economics, Elsevier, Elsevier, vol. 97(3), pages 329-342, September.
    6. Alfares, Hesham K. & Elmorra, Hassan H., 2005. "The distribution-free newsboy problem: Extensions to the shortage penalty case," International Journal of Production Economics, Elsevier, Elsevier, vol. 93(1), pages 465-477, January.
    7. Demetrios Vakratsas & Fred M. Feinberg & Frank M. Bass & Gurumurthy Kalyanaram, 2004. "The Shape of Advertising Response Functions Revisited: A Model of Dynamic Probabilistic Thresholds," Marketing Science, INFORMS, INFORMS, vol. 23(1), pages 109-119, April.
    8. Khouja, Moutaz & Robbins, Stephanie S., 2003. "Linking advertising and quantity decisions in the single-period inventory model," International Journal of Production Economics, Elsevier, Elsevier, vol. 86(2), pages 93-105, November.
    9. Özler, Aysun & Tan, BarIs & Karaesmen, Fikri, 2009. "Multi-product newsvendor problem with value-at-risk considerations," International Journal of Production Economics, Elsevier, Elsevier, vol. 117(2), pages 244-255, February.
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    Cited by:
    1. Halkos, George & Kevork, Ilias, 2012. "Evaluating alternative estimators for optimal order quantities in the newsvendor model with skewed demand," MPRA Paper 36205, University Library of Munich, Germany.
    2. Roy, Arpita & Sana, Shib Sankar & Chaudhuri, Kripasindhu, 2012. "Optimal replenishment order for uncertain demand in three layer supply chain," Economic Modelling, Elsevier, vol. 29(6), pages 2274-2282.
    3. Andersson, Jonas & Jörnsten, Kurt & Nonås, Sigrid Lise & Sandal, Leif & Ubøe, Jan, 2013. "A maximum entropy approach to the newsvendor problem with partial information," European Journal of Operational Research, Elsevier, vol. 228(1), pages 190-200.
    4. Güler, M. Güray, 2014. "A note on: “The effect of optimal advertising on the distribution-free newsboy problem”," International Journal of Production Economics, Elsevier, Elsevier, vol. 148(C), pages 90-92.
    5. Su, Rung Hung & Pearn, Wen Lea, 2011. "Product selection for newsboy-type products with normal demands and unequal costs," International Journal of Production Economics, Elsevier, Elsevier, vol. 132(2), pages 214-222, August.
    6. Halkos, George & Kevork, Ilias, 2012. "Validity and precision of estimates in the classical newsvendor model with exponential and rayleigh demand," MPRA Paper 36460, University Library of Munich, Germany.

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