The newsvendor's joint procurement and pricing problem under price-sensitive stochastic demand and purchase price uncertainty

Abstract

We assume that a newsvendor has a particular time period before the commencement of the selling season to make a one-time “time-flexible” purchase (Li and Kouvelis [19]) from one of the multiple alternative suppliers that differ in their fluctuating price processes, and then sets the price to satisfy the price-sensitive stochastic demand. We develop the joint procurement planning and pricing procedure to maximize the newsvendor's expected profit, and further develop a reality-adaptable solution algorithm to simplify the procedure, which quickly decreases the computational complexity when there exist multiple alternative suppliers and the procurement planning period is long. We analyze how the preseason cost, i.e., the total cost before selling season, affects the firm's optimal order quantity, selling price, and the optimal expected profit, and then compare the joint procurement and pricing decisions (to maximize the expected profit) with separate procurement and pricing decisions, i.e., making procurement decision (to minimize the expected cost) first and then pricing decision (to maximize the expected revenue). Through extensive numerical analysis: (1) We demonstrate that the joint purchasing and selling strategy performs much better than making purchasing and selling decisions separately. (2) We show that the firm's optimal expected profit benefits greatly from increasing the potential supplier base. (3) We study the effect of the key parameters on the purchasing decisions.