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The Newsvendor Model with Consumer Search Costs
Author(s) -
Petruzzi Nicholas C.,
Wee Kwan E.,
Dada Maqbool
Publication year - 2009
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/j.1937-5956.2009.01040.x
Subject(s) - newsvendor model , context (archaeology) , dimension (graph theory) , product (mathematics) , economics , microeconomics , computer science , business , marketing , supply chain , mathematics , paleontology , geometry , pure mathematics , biology
We study the newsvendor problem when consumers are heterogeneous either in their valuations of the newsvendor's product, in their valuations of an outside option available to them, or in both valuations. In this context, we observe that the outside option, which represents the value that a given consumer associates with choosing not to purchase the newsvendor's product, may be interpreted as a search cost. Taking into consideration whether consumers' valuations differ on either one dimension of heterogeneity or on both dimensions, we develop a framework for classifying newsvendor models that incorporate demand‐management effects. In particular, we show that this framework includes both the newsvendor model with price‐dependent demand and the newsvendor model with endogenous demand as special cases. In addition to making a conceptual contribution by developing and drawing insights from this framework, we make technical contributions by providing more general sufficient conditions under which the underlying optimization problems are well behaved.