The Competitive Newsboy

Abstract

We consider a competitive version of the classical newsboy problem—in which a firm must choose an inventory or production level for a perishable good with random demand, and the optimal solution is a fractile of the demand distribution—and investigate the impact of competition upon industry inventory. A splitting rule specifies how initial industry demand is allocated among competing firms and how any excess demand is allocated among firms with remaining inventory. We examine the relation between equilibrium inventory levels and the splitting rule and provide conditions under which there is a unique equilibrium. Our most general result is that if all excess demand is reallocated, i.e., there is perfect substitutability, then competition never leads to a decrease in industry inventory.

Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments

“…Bashyam (1996) considers capacity expansion in a two-stage setting akin to a static newsvendor network but with private, Bayesian demandinformation updating. Lippman and McCardle (1997) show how a newsvendor critical-fractile solution extends to a competitive setting with multiple agents supplying a single market with fixed-price and univariate demand uncertainty. That solution critically depends on the "splitting rules" that specify how initial demand is allocated among competing firms and how any excess demand is allocated among firms with remaining capacity (or inventory).…”

Capacitated Production Control with Virtual Lateral Transshipments

“…Payoff functions having the supermodularity property and the related property of increasing differences make many games brimming with special properties; see e.g., Topkis (1979), Milgrom and Roberts (1990), Vives (1990), and Lippman and McCardle (1997) as references.…”

Product Line Selection and Pricing with Modularity in Design

“…Modularity can also be used for postponing differentiation points and inventory pooling (see, e.g., Ramdas 2003 for a summary), which may also reduce overhead cost and affect production costs (a violation of Assumption 3). Explicitly modeling a multiproduct inventory decision involves many technical concerns, such as demand rationing when stockouts occur (see, e.g., Lippman andMcCardle 1997, Netessine andRudi 2003), and hence needs further investigation. Including economies of scale in production would also make the comparison with empirical work (e.g., Srinivasan 1990, Bayus andPutsis 1999) more appropriate.…”