The Newsvendor Model with Consumer Search Costs

Publication Type

Journal Article

Publication Date

2010

Abstract

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.

Discipline

Marketing | Sales and Merchandising

Research Areas

Organisational Behaviour and Human Resources

Publication

Production and Operations Management

Volume

6

Issue

6

First Page

693

Last Page

704

ISSN

1059-1478

Identifier

10.1111/j.1937-5956.2009.01040.x

Publisher

Wiley

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