An elasticity approach to the newsvendor with price-sensitive demand

Abstract

We introduce a measure of elasticity of stochastic demand, called the elasticity of the lost-sales rate, which offers a unifying perspective on the well-known newsvendor with pricing problem. This new concept provides a framework to characterize structural results for coordinated and uncoordinated pricing and inventory strategies. Concavity and submodularity of the profit function, as well as sensitivity properties of the optimal inventory and price policies, are characterized by monotonicity conditions, or bounds, on the elasticity of the lost-sales rate. These elasticity conditions are satisfied by most relevant demand models in the marketing and operations literature. Our results unify and complement previous work on price-setting newsvendor models and provide a new tool for researchers modeling stochastic price-sensitive demand in other contexts. © 2011 INFORMS.