On the effect of demand randomness on inventory, pricing and profit
Chua, Geoffrey Bryan Ang
Date of Issue2015
College of Business (Nanyang Business School)
We consider a stocking-factor-elasticity approach for pricing newsvendor facing multiplicative demand uncertainty with lost sales. For a class of iso-elastic demand curves, we prove that optimal order quantity decreases in demand uncertainty for zero salvage value. This contrasts with fixed-price newsvendor results which depend on the critical ratio. Numerical tests show that optimal order quantity increases in demand uncertainty for high salvage value, low marginal cost, and low price-elasticity. We also report results on optimal price, service level, and profit.
Operations research letters
© 2015 Elsevier B.V. This is the author created version of a work that has been peer reviewed and accepted for publication by Operations Research Letters, Elsevier B.V. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1016/j.orl.2015.07.007].