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

We study the effects of demand uncertainty on optimal decisions and the expected profit of a pricesetting 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 hig...

• Type: Journal
• Year: 2010
• Where: EOR
• Authors: Minghui Xu, Youhua (Frank) Chen, Xiaolin Xu
• Keywords: Demand Case, EOR 2010, Expected Profit, Larger Demand