Inventories and Stock-out Costs in the Price-Setting Newsvendor: An Economic Interpretation

Miguel Ampudia and Michael Salinger
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Miguel Ampudia: Boston University

Chapter Chapter 6 in Handbook of Newsvendor Problems, 2012, pp 163-175 from Springer

Abstract: Abstract According to the Lerner rule, a firm’s profit-maximizing price under certainty can be characterized with just two parameters: marginal cost and the elasticity of demand. Salinger and Ampudia (Salinger, M. A., & Ampudia, M. (2011). Simple economics of the price-setting newsvendor problem. Managament Science, 57, 1996–1998.) showed that in the most basic version of the price-setting newsvendor (i.e., with no inventories or stock-out costs), the Lerner rule applies with suitable modifications to the definition of marginal cost and the elasticity of demand. This chapter extends that result to the more general version of the price-setting newsvendor problem that allows for stock-out costs and for unsold output to have some residual value as inventory. This extension suggests that the Lerner rule characterization can be a unifying framework for a wide variety of extensions to the price-setting newsvendor problem.

Keywords: Newsvendor problem; Demand uncertainty; Mark-ups; Inventories; Lerner relationship (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/978-1-4614-3600-3_6

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