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Mixed contracts for the newsvendor problem with real options

  • Jörnsten, Kurt

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Nonås, Sigrid Lise

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Sandal, Leif K.

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Ubøe, Jan

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

In this paper we consider the newsvendor model with real options. We consider a mixed contract where the retailer can order a combination of q units subject to the conditions in a classical newsvendor contract and Q real options on the same items. We provide a closed form solution to this mixed contract when the demand is discrete and study some of its properties. We also offer an explicit solution for the continuous case. In particular we demonstrate that a mixed contract may be superior to a real option contract when a manufacturer has a bound on how much variance she is willing to accept.

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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2011/6.

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Length: 28 pages
Date of creation: 06 Apr 2011
Date of revision:
Handle: RePEc:hhs:nhhfms:2011_006
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