The inverse newsvendor problem: Choosing an optimal demand portfolio for capacitated resources

The classical newsvendor problem is one of optimally choosing a level of ca pacity to respond to a known demand distribution. The inverse newsvendor pr oblem is one of optimally choosing a demand distribution with fixed capacit y. The applications of the inverse problem include industrial settings wher e demand management is relatively less costly than capacity adjustments. De mand distributions are chosen from an opportunity set, which reflects the s et of market opportunities for the firm. We analyze the firm's profit as a function of these demand alternatives, provide solution methods and insight s, and identify inefficient and dominated distributions. We provide results when the opportunity set is known or only partially known. We extend the r esults to cases in which there are multiple prioritized customer classes th at share the firm's productive capacity. This paper was motivated by an ind ustrial application in a firm selling a semicommodity product into three pr ioritized industrial sectors. We review the application of our methods to t his setting.