A Newsvendor Who Chooses Informational Effort

Thomas Marschak, J. George Shanthikumar, Junjie Zhou

Production and Operations Management · 2015 · Volume 24 · Issue 1

Abstract

We study a newsvendor who can acquire the services of a forecaster, or, more generally, an information gatherer (IG) to improve his information about demand. When the IG's effort increases, does the averageex anteorder quantity rise or fall? Do averageex postsales rise or fall? Improvements in information technology and in the services offered by forecasters provide motivation for the study of these questions. Much depends on our model of the IG and his efforts. We study an IG who sends a signal to a classic single-period newsvendor. The signal defines the newsvendor's posterior probability distribution on the possible demands and the newsvendor uses that posterior to calculate the optimal order. Each of the possible posteriors is a scale/location transform of the same base distribution. When the IG works harder, the average scale parameter drops. Higher IG effort is always useful to the newsvendor. We show that there is a critical value of order cost. For costs on one side of this value more IG effort leads to a higher averageex anteorder and for costs on the other side to a lower average order. But for all costs, more IG effort leads to higher averageex postsales. We obtain analogous results for a “regret-averse” newsvendor who suffers a penalty that is a nonlinear function of the discrepancy between quantity ordered and true demand.

Keywords

newsvendor, inventory management, information gathering, demand forecasting

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