The newsvendor problem with advertising

Abstract

The classic newsvendor problem is to make a single - period procurement decision of a single product under stochastic demands. The newsvendor problem with advertising decision provides an important means to examine how operational problems interacts with marketing issues to influence decision-making at the firm level. When a newsvendor faces stochastic advertisement-sensitive demands, he has to make the advertising and inventory decisions before the demand is realized. In this paper, we investigate the case in which advertising leads to in creasing in sales under stochastic additive demand. We assume the mean demand is strictly increasing and strictly concave in advertising premium and explore: (1) the optimal solution's properties and (2) the comparative statics of parameter changes.

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