The newsvendor model with consumer search costs

Nicholas C. Petruzzi, Kwan E. Wee, Maqbool Dada

Research output: Contribution to journalArticlepeer-review

Abstract

We study the newsvendor problem when consumers are heterogeneous either in their valuations of the newsvendor's product, in their valuations of an outside option available to them, or in both valuations. In this context, we observe that the outside option, which represents the value that a given consumer associates with choosing not to purchase the newsvendor's product, may be interpreted as a search cost. Taking into consideration whether consumers' valuations differ on either one dimension of heterogeneity or on both dimensions, we develop a framework for classifying newsvendor models that incorporate demand-management effects. In particular, we show that this framework includes both the newsvendor model with price-dependent demand and the newsvendor model with endogenous demand as special cases. In addition to making a conceptual contribution by developing and drawing insights from this framework, we make technical contributions by providing more general sufficient conditions under which the underlying optimization problems are well behaved.

Original languageEnglish (US)
Pages (from-to)693-704
Number of pages12
JournalProduction and Operations Management
Volume18
Issue number6
DOIs
StatePublished - Nov 1 2009

Keywords

  • Heterogeneous consumers
  • Inventory effects
  • Newsvendor
  • Pricing

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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