The Multiproduct Newsvendor Problem with Customer Choice

Abstract

We address the multiproduct newsvendor problem under a general specification of customer choice behavior. We develop a methodology that yields upper bounds on the optimal value as well as feasible inventory solutions. The methodology is based on an approximate Jordan decomposition of the state transition matrix. Two specializations of the methodology are presented: one leads to a decomposition by customer into a sequence of assortment optimization problems and the second leads to a decomposition by product into a collection of independent newsvendor problems. We conduct computational experiments and find that the proposed methodology outperforms existing bounds. The electronic companion is available at https://doi.org/10.1287/opre.2017.1654 .