Determining optimal price and order size for a price setting newsvendor under cycle service level

Abstract

There has been significant interest in the single period newsvendor problem where, besides determining the order size, the decision maker has to set the selling price. The model is applicable when demand for the product is a stochastic function of the selling price. Although there have been several studies, the problem needs exploration given that retailers prefer using service level rather than the shortage cost to model the economic consequence of a stock out. We analyze the problem using a chance constrained formulation and provide a procedure for determining the optimal price and order size for a price-setting newsvendor.