The Effect of Demand Uncertainty in a Price-Setting Newsvendor Model

European Journal of Operational Research, Vol. 207, pp. 946–957, 2010

Posted: 9 Apr 2011

See all articles by Minghui Xu

Minghui Xu

Wuhan University - School of Economics and Management

Youhua Chen

Independent

Xu Xiaolin

Nanjing University - School of Business

Date Written: April 6, 2011

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.

Keywords: Newsvendor, Pricing, Demand uncertainty, Stochastic comparison

Suggested Citation

Xu, Minghui and Chen, Youhua and Xiaolin, Xu, The Effect of Demand Uncertainty in a Price-Setting Newsvendor Model (April 6, 2011). European Journal of Operational Research, Vol. 207, pp. 946–957, 2010, Available at SSRN: https://ssrn.com/abstract=1804041

Minghui Xu (Contact Author)

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bei 430072
China

Youhua Chen

Independent ( email )

Xu Xiaolin

Nanjing University - School of Business ( email )

22 Hankou Road
Nanjing, Jiangsu 210093 210093
China

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