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An Elasticity Approach to the Newsvendor with Price-Sensitive Demand

Author

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  • Ayşe Kocabıyıkoğlu

    (Department of Management, Bilkent University, Bilkent, Ankara 06800, Turkey)

  • Ioana Popescu

    (Decision Sciences Area, INSEAD, Singapore 138676, Republic of Singapore)

Abstract

We introduce a measure of elasticity of stochastic demand, called the elasticity of the lost-sales rate, which offers a unifying perspective on the well-known newsvendor with pricing problem. This new concept provides a framework to characterize structural results for coordinated and uncoordinated pricing and inventory strategies. Concavity and submodularity of the profit function, as well as sensitivity properties of the optimal inventory and price policies, are characterized by monotonicity conditions, or bounds, on the elasticity of the lost-sales rate. These elasticity conditions are satisfied by most relevant demand models in the marketing and operations literature. Our results unify and complement previous work on price-setting newsvendor models and provide a new tool for researchers modeling stochastic price-sensitive demand in other contexts.

Suggested Citation

  • Ayşe Kocabıyıkoğlu & Ioana Popescu, 2011. "An Elasticity Approach to the Newsvendor with Price-Sensitive Demand," Operations Research, INFORMS, vol. 59(2), pages 301-312, April.
    • Handle: RePEc:inm:oropre:v:59:y:2011:i:2:p:301-312
    DOI: 10.1287/opre.1100.0890
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    References listed on IDEAS

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