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Inventories and Stock-out Costs in the Price-Setting Newsvendor: An Economic Interpretation

In: Handbook of Newsvendor Problems

Author

Listed:
  • Miguel Ampudia

    (Boston University)

  • Michael A. Salinger

    (Boston University)

Abstract

According to the Lerner rule, a firm’s profit-maximizing price under certainty can be characterized with just two parameters: marginal cost and the elasticity of demand. Salinger and Ampudia (Salinger, M. A., & Ampudia, M. (2011). Simple economics of the price-setting newsvendor problem. Managament Science, 57, 1996–1998.) showed that in the most basic version of the price-setting newsvendor (i.e., with no inventories or stock-out costs), the Lerner rule applies with suitable modifications to the definition of marginal cost and the elasticity of demand. This chapter extends that result to the more general version of the price-setting newsvendor problem that allows for stock-out costs and for unsold output to have some residual value as inventory. This extension suggests that the Lerner rule characterization can be a unifying framework for a wide variety of extensions to the price-setting newsvendor problem.

Suggested Citation

  • Miguel Ampudia & Michael A. Salinger, 2012. "Inventories and Stock-out Costs in the Price-Setting Newsvendor: An Economic Interpretation," International Series in Operations Research & Management Science, in: Tsan-Ming Choi (ed.), Handbook of Newsvendor Problems, edition 127, chapter 0, pages 163-175, Springer.
    • Handle: RePEc:spr:isochp:978-1-4614-3600-3_6
    DOI: 10.1007/978-1-4614-3600-3_6
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