A distribution free approach to newsvendor problem with pricing

The newsvendor problem with pricing is an important tool that provides the relationship between the operational and marketing issues at the firm’s level. This paper investigates the use of the distribution free approach to solve the standard newsvendor problem with pricing and its extension to the holding and shortage cost case. The approach is vital for the situations in which a firm may be missing demand distribution information or historical demand data may not fit any standard probability distributions. The approach develops deterministic approximations by establishing lower bounds on the expected revenues of the standard newsvendor problem with pricing and its extension. The lower bounds are shown jointly concave in price and order quantity. It is also demonstrated that the use of this approach can yield closed form expressions for jointly optimal pricing and order quantities which can find many practical managerial applications in several industries facing yield management decisions. Numerical experimentation demonstrates the performance of the distribution free approach under various demand situations.