An Agent-Based Approach to the Newsvendor Problem with Price-Dependent Demand

Patrick R Mcmullen

doi:10.4236/ajor.2020.104006

Abstract

This research presents an agent-based approach to finding near-optimal solutions to the newsvendor problem with price-dependent demand. The classical newsvendor problem is pursued where the decision of order quantity needs to be made in order to maximize expected profit. Here, the additional caveat of price-sensitive demand is included. This means that price (P) and order quantity (Q) are decision variables under the control of the newsvendor, with the intent of maximizing the expected value of the associated profit. The solution approach exploits an agent-based strategy, where an artificial agent traverses a grid-coordinate system of Price and Quantity values, where each unique Price and Quantity combination results in an expected profit. The agent-based approach consistently results in optimal solutions to a problem from the literature.

Highlights

The classical newsvendor problem involves individual selling items on a periodic basis
The methodology used for this effort is essentially comprised of three parts: the first part details the newsvendor model with price-sensitive demand; the second part details the construction of the search space for the artificial agent; and the third part details the simulation model used to guide the artificial agent’s search for optimality
One of the unique things associated with the test problem is that we already know the optimal solution before we pursue the optimal solution via the artificial agent search

Summary

Introduction

The classical newsvendor (formerly known as “newsboy”) problem involves individual selling items on a periodic basis (such as daily newspapers). The individual needs to determine how many items to purchase to re-sell in the face of uncertain demand to maximize the expected profit [1]. If the individual purchases too many items, supply exceeds demand, and the excess supply must be discarded or sold at a loss. If the individual purchase too few items, demand exceeds supply, and opportunity loss occurs. As such, deciding the “best” purchase quantity is of great importance. Another variable to consider is the price. A fundamental law of economics tells us that for commodity items, demand decreases as price increases.

Methods

Results

Conclusion