Note: The Newsvendor Model with Endogenous Demand

James Dana and Nicholas C. Petruzzi ()
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Nicholas C. Petruzzi: University of Illinois, 350 Wohlers Hall, 1206 South Sixth Street, Champaign, Illinois 61820

Management Science, 2001, vol. 47, issue 11, 1488-1497

Abstract: This paper considers a firm's price and inventory policy when it faces uncertain demand that depends on both price and inventory level. The authors extend the classic newsvendor model by assuming that expected utility maximizing consumers choose between visiting the firm and consuming an exogenous outside option. The outside option represents the utility the consumer forgoes when she chooses to visit the firm before knowing whether or not the product will be available. The authors investigate both the case in which the firm's price is exogenous and the case in which price is chosen optimally. The paper makes two contributions. First, the authors show that the firm holds more inventories, provides a higher fill rate, attracts more customers, and earns higher profits when it internalizes the effect of its inventory on demand. Second, the authors show that in the endogenous price case the firm's two-dimensional decision problem can be reduced to two, sequential, single-variable optimizations. As a result, the endogenous-price case is as easy to solve as the exogenous-price case.

Keywords: Newsvendor Model; Inventory; Demand Uncertainty; Pricing; Service Rate Competition; Fill Rate Competition; Service Levels (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (83)

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