Dynamic learning, pricing, and ordering by a censored newsvendor

Arnab Bisi · Maqbool Dada

38 citations0/0 files storedNaval Research Logistics (NRL)

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Supply Chain and Inventory Management Consumer Market Behavior and Pricing Sustainable Supply Chain Management

Abstract

Abstract We address the problem of determining optimal ordering and pricing policies in a finite‐horizon newsvendor model with unobservable lost sales. The demand distribution is price‐dependent and involves unknown parameters. We consider both the cases of perishable and nonperishable inventory. A very general class of demand functions is studied in this paper. We derive the optimal ordering and pricing policies as unique functions of the stocking factor (which is a linear transformation of the safety factor). An important expression is obtained for the marginal expected value of information. As a consequence, we show when lost sales are unobservable, with perishable inventory the optimal stocking factor is always at least as large as the one given by the single‐period model; however, if inventory is nonperishable, this result holds only under a strong condition. This expression also helps to explain why the optimal stocking factor of a period may not increase with the length of the problem. We compare this behavior with that of a full information model. We further examine the implications of the results to the special cases when demand uncertainty is described by additive and multiplicative models. For the additive case, we show that if demand is censored, the optimal policy is to order more as well as charge higher retail prices when compared to the policies in the single‐period model and the full information model. We also compare the optimal and myopic policies for the additive and multiplicative models. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007

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References

1999Inventory management and production planning and scheduling 1999Pricing and the Newsvendor Problem: A Review with Extensions 1959Uncertainty and Price Theory 1965Optimal Policy for a Multi-Product, Dynamic, Nonstationary Inventory Problem 1985Bayes Solution to Dynamic Inventory Models Under Unknown Demand Distribution 1959Bayes Solutions of the Statistical Inventory Problem 1960Dynamic Inventory Policy with Varying Stochastic Demands 1999Stalking Information: Bayesian Inventory Management with Unobserved Lost Sales

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2011A Censored-Data Multiperiod Inventory Problem with Newsvendor Demand Distributions 2012The multi-product price-setting newsvendor with resource capacity constraints 2009Technical Note—A Note on “The Censored Newsvendor and the Optimal Acquisition of Information”2008Inventory Control with Unobservable Lost Sales and Bayesian Updates 2021Inventory decision-making biases: a review and suggestions for future research

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