The price-setting newsvendor: review and extensions

Abstract

The newsvendor problem is a staple of operations management research, pedagogy and practice. From its humble roots as a single-period problem for a price-taking newspaper seller, this problem (and its solutions) has inspired generations of researchers and students while contributing to inventory management at countless firms. One major extension of the newsvendor problem was the extension of the decision variables to include price as well as quantity. This extension has been known for decades, but recently gained new life, as researchers have expended considerable energy in analysing and exploring this scenario. We trace major developments in the single-period, price- and quantity-setting newsvendor problem in the recent past and propose extensions of these developments. We also extend a relatively unexplored model describing a price-setting newsvendor faced with a fixed stock level to show that there is a unique optimising price and that, as in the price- and quantity-setting newsvendor problem, the optimal price depends heavily on the form of the demand uncertainty.

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