Optimal pricing and inventory decisions when individual customer preferences are explicitly modelled

Abstract

We approach the newsvendor with pricing problem as a practitioner who must model demand as a function of price. Previous work required strong assumptions about demand curves, making practical implementation of results problematical. Instead, we assume that customers have reservation prices which can be determined through standard marketing/statistical techniques. We then derive a demand curve and investigate the ramifications for setting the optimal price and quantity. We demonstrate that a practitioner often need only estimate some intuitive quantities of the possible consumers. Using our approach, it is possible to infer what assumptions impose on a model of individual consumer behaviour.

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