Inventory and pricing decisions in a single-period problem involving risky supply

Abstract

We explore an extension of the single-period (newsboy) inventory problem when supply is uncertain. We look into the negotiations between a newsvendor (retailer) and a manufacturer when there is competition from a second supplier. There is a chance that the second supplier will not be able to deliver the product. The retailer can maximize his expected profit by optimally allocating his order between the two suppliers. The retailer’s ordering problem is analyzed in conjunction with the manufacturer’s related pricing problem. The effects of demand and supply uncertainties on the optimal decisions of the parties are explored using numerical examples. We also explore extension of the retailer’s problem to the cases of order cancellation, price-dependent demand, and demand-dependent supply availability.