The effect of supply uncertainty in price-setting newsvendor models

Minghui Xu and Ye Lu

European Journal of Operational Research, 2013, vol. 227, issue 3, 423-433

Abstract: We consider a price-setting newsvendor model in which a firm needs to make joint inventory and pricing decisions before the selling season. The supply process is uncertain such that the received quantity is the product of the order quantity and a random yield rate. Two cost structures are investigated, the in-house production case in which the firm pays for the input quantity and the procurement case in which the firm pays for the quantity received only. Our objective is to investigate the effect of yield randomness on optimal decisions and expected profit. By using the theory of stochastic comparisons, we find that under both cost structures, a less variable yield rate leads to a lower optimal price and a higher expected profit. Moreover, we show that in the in-house production case, a stochastically larger yield rate also results in a lower optimal price and a higher profit, but this is not true in the procurement case. Examples show that the effect of supply uncertainty on optimal order quantity is not universal.

Keywords: Supply uncertainty; Price-dependent newsvendor model; Stochastic comparisons; Emergency supply option (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:227:y:2013:i:3:p:423-433

DOI: 10.1016/j.ejor.2012.12.008

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