Price Postponement in a Decentralized Newsvendor Model under Uncertain Supply and Demand

Abstract

With the rise of global procurement, economic globalization, on the one hand, promotes the development of supply chain; on the other hand it also increases the risk of supply chain, which makes the supply increasingly uncertain. According to the newsvendor model, we analyze the effect of price postponement in a decentralized newsvendor model with additive and price-dependent demand, wherein the supplier sets the wholesale price, and the retailer determines the order quantity and retail price. Such postponement strategies can be used by the retailer by delaying his retail price until after supply and demand uncertainties are observed. This research demonstrates the existence and uniqueness of the optimal order quantity of the retailer. We further shows that retailer adopts the price postponement strategy can reduce market uncertainty risk for retailers under the price dependent stochastic demand and uncertain supply by numerical simulation. At the same time, with the increase of the supplier’s production cost, the selling price (or expected price) will increase, order quantity will decrease, and the expected profit of the supplier and retailer will decrease under pricing postponement model.