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

Author

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

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.

Suggested Citation

  • Xu, Minghui & Chen, Youhua (Frank) & Xu, Xiaolin, 2010. "The effect of demand uncertainty in a price-setting newsvendor model," European Journal of Operational Research, Elsevier, vol. 207(2), pages 946-957, December.
  • Handle: RePEc:eee:ejores:v:207:y:2010:i:2:p:946-957
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:transe:v:106:y:2017:i:c:p:78-97 is not listed on IDEAS
    2. 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.
    3. 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.
    4. Jammernegg, Werner & Kischka, Peter, 2013. "The price-setting newsvendor with service and loss constraints," Omega, Elsevier, vol. 41(2), pages 326-335.
    5. Colombo, Luca & Labrecciosa, Paola, 2012. "A note on pricing with risk aversion," European Journal of Operational Research, Elsevier, vol. 216(1), pages 252-254.
    6. Fleischhacker, Adam J. & Fok, Pak-Wing, 2015. "On the relationship between entropy, demand uncertainty, and expected loss," European Journal of Operational Research, Elsevier, vol. 245(2), pages 623-628.
    7. 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.
    8. Xue, Weili & Caliskan Demirag, Ozgun & Niu, Baozhuang, 2014. "Supply chain performance and consumer surplus under alternative structures of channel dominance," European Journal of Operational Research, Elsevier, vol. 239(1), pages 130-145.
    9. repec:eee:jomega:v:75:y:2018:i:c:p:27-56 is not listed on IDEAS
    10. repec:wsi:apjorx:v:34:y:2017:i:02:n:s0217595917500014 is not listed on IDEAS
    11. repec:eee:ejores:v:269:y:2018:i:2:p:695-698 is not listed on IDEAS
    12. repec:eee:ejores:v:265:y:2018:i:3:p:962-974 is not listed on IDEAS
    13. Azad Gholami, Reza & Sandal, Leif K. & Ubøe, Jan, 2016. "Channel Coordination in a Multi-period Newsvendor Model with Dynamic, Price-dependent Stochastic Demand," Discussion Papers 2016/6, Norwegian School of Economics, Department of Business and Management Science.
    14. 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.
    15. repec:eee:ejores:v:268:y:2018:i:1:p:193-202 is not listed on IDEAS
    16. Serel, Doğan A., 2015. "Production and pricing policies in dual sourcing supply chains," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 76(C), pages 1-12.
    17. repec:kap:netspa:v:17:y:2017:i:2:d:10.1007_s11067-016-9333-y is not listed on IDEAS
    18. Serel, Doğan A., 2017. "A single-period stocking and pricing problem involving stochastic emergency supply," International Journal of Production Economics, Elsevier, vol. 185(C), pages 180-195.
    19. 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.
    20. Sandal, Leif K. & Ubøe, Jan, 2012. "Stackelberg equilibria in a multiperiod vertical contracting model with uncertain and price-dependent demand," Discussion Papers 2012/2, Norwegian School of Economics, Department of Business and Management Science.
    21. Oh, Sechan & Rhodes, James & Strong, Ray, 2016. "Impact of cost uncertainty on pricing decisions under risk aversion," European Journal of Operational Research, Elsevier, vol. 253(1), pages 144-153.
    22. Ye, Taofeng & Sun, Hao, 2016. "Price-setting newsvendor with strategic consumers," Omega, Elsevier, vol. 63(C), pages 103-110.

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