The Newsvendor Problem with Pricing

Abstract

In the newsvendor problem with pricing, the seller of homogeneous items attempts to maximize expected profit by setting price(s) and inventory level(s) before realizing exact demand for the items. The first step in solving the problem is to model this demand, which in the literature, is most commonly done using additive or multiplicative uncertainty, often without justification for either choice. From here, the problem is solved in a variety of ways. In this document, a model for demand is derived from two basic quantities: size of customer base and distribution of reservation prices of the population, where a reservation price is the most a customer is willing to pay for an item. This demand model is then incorporated into expected profit functions for various scenarios of the problem, and the optimal results found using these functions are compared with those optimal results found using other methods found in the literature.

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