Analysis of the Impact of Demand Volatility and Return Policies on a Price-setting Newsvendor

摘要

This paper studies a newsvendor problem in which the retailer can set both the selling price and the quantity ordered. The demand is stochastic and price-dependent and the retailer has the possibility to sell his unsold units at the end of the sales season. We present an analytical model of the retailer optimization process and show the conditions that the retailer can find optimal quantity and price simultaneously, then we use numerical methods to reveal the properties of retailer’s behavior. The existing results of price-setting newsvendor do not include buyback and our work brings a new condition on the lost sales rate elasticity for the computation of an optimal solution. Our results show that return policies can improve the profit of retailer and that this effect increases with the volatility of the demand. This observation reveals a crucial point for the supplier to design their contract according to demand uncertainty, allowing them to influence the retailer’s decision on price and order quantity by offering buy-back for unsold products.