Transfer of risk in the newsvendor model with discrete demand

Kurt Jörnsten, Sigrid Lise Nonås, Leif Sandal () and Jan Ubøe

Omega, 2012, vol. 40, issue 3, 404-414

Abstract: In this paper we consider the transfer of risk in a newsvendor model with discrete demand. We view the newsvendor model as a leader/follower problem where the manufacturer (leader) decides the wholesale price and the retailer (follower) decides the quantity ordered. Taking a Pareto-optimal contract as a starting point, the manufacturer wishes to design a real option contract to enhance profits. A new real option contract is said to be feasible if both parties' expected profit is at least as great as in the original contract. When demand is discrete, there are usually infinite feasible contracts that yield maximum expected profits to the manufacturer. In the paper we show that either all, some or none of these real option contracts offer an improved position for the retailer.

Keywords: Newsvendor model; Discrete demand; Real options; Transfer of risk (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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DOI: 10.1016/j.omega.2011.07.001

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