The Price-Setting Newsvendor Model with Variable Salvage Value

Abstract

The classical newsvendor problem decides the optimal order quantity for a single period, with the assumptions that the selling price and the end of period salvage value are fixed. However, the salvage value or clearance price in many instances depends on the leftover inventory. A fixed salvage value assumption could lead to suboptimal decisions in many situations. We determine the optimal pricing and ordering decision for a newsvendor with variable salvage value. Both additive and multiplicative demand models are considered, and we provide the necessary and sufficient conditions for unique pricing and ordering policies in both cases. We mathematically compare the results against the fixed salvage value newsvendor model and prove that the variable salvage value newsvendor model improves the ordering decision and profit level.