Stochastic comparisons in a price-dependent newsvendor problem with emergency procurement

Abstract

We consider a newsvendor problem with price-dependent demand and emergency purchase option allowed after the realization of random demand. By stochastic comparisons, we investigate the effects of demand uncertainty on pricing and order quantity decisions as well as expected profit of the newsvendor, under second order stochastic dominance. Our findings include: (i) in general, a less variable demand shock leads to a higher expected profit for both additive and multiplicative demand models; (ii) a less variable demand shock has no effect on price for the additive demand model, while leads to a higher price for the multiplicative demand model. The implications of these findings for pricing and order quantity are discussed.