Simple Economics of the Price-Setting Newsvendor Problem

Michael Salinger and Miguel Ampudia Fraile

Management Science, 2011, vol. 57, issue 11, 1996-1998

Abstract: The Lerner relationship linking the profit-maximizing price to marginal cost and the elasticity of demand generalizes to the price-setting newsvendor, and the result resolves the puzzle over the different effects of additive and multiplicative uncertainty on the solution. Multiplicative uncertainty increases the optimal price because it increases the marginal cost of a unit sold and does not affect the markup factor. Additive uncertainty has no effect on the marginal cost of a unit sold and lowers the markup factor because it increases the elasticity of the average quantity sold with respect to price. This paper was accepted by Martin Lariviere, operations management.

Keywords: cost analysis; inventory/production; perishable/aging items; uncertainty; marketing; pricing (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (9)

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