Pricing and the newsvendor problem: A review with extensions

In the newsvendor problem, a decision maker facing random demand for a peri shable product decides how much of it to stock for a single selling period. This simple problem with its intuitively appealing solution is a crucial b uilding block of stochastic inventory theory, which comprises a vast litera ture focusing on operational efficiency. Typically in this literature, mark et parameters such as demand and selling price are exogenous. However, inco rporating these factors into the model can provide an excellent vehicle for examining how operational problems interact with marketing issues to influ ence decision making at the firm level. In this paper we examine an extensi on of the newsvendor problem in which stocking quantity and selling price a re set simultaneously. We provide a comprehensive review that synthesizes e xisting results for the single period problem and develop additional result s to enrich the existing knowledge base. We also review and develop insight into a dynamic inventory extension of this problem, and motivate the appli cability of such models.