Note: The newsvendor model with endogenous demand

This paper considers a firm's price and inventory policy when it faces unce rtain demand that depends on both price and inventory level. The authors ex tend the classic newsvendor model by assuming that expected utility maximiz ing consumers choose between visiting the firm an consuming an exogenous, o utside option. The outside option represents the utility the consumer forgo es when she chooses to visit the firm before-knowing whether or not the pro duct will be available. The authors investigate both the case in which the firm's price is exogenous and the case in which price is chosen optimally. The paper makes two contributions. First, the authors show that the firm ho lds more inventories, provides a higher fill rate, attracts more customers, and earns higher profits when it internalizes the effect of its inventory on demand. Second, the authors show that in the endogenous price case the f irm's two-dimensional decision problem can be reduced to two, sequential, s ingle-variable optimizations. As a result, the endogenous-price case is as easy to solve as the exogenous-price case.