Newsvendor problem with clearance pricing

Abstract The newsvendor (NV) problem assumes that the salvage/clearance price at which the leftover inventory is disposed of is a given parameter of the problem. In this paper, we relax this assumption and consider the NV problem with the salvage/clearance price as a decision variable. We have drawn from the literatures on the NV problem and clearance/markdown/dynamic pricing to develop three stochastic models in this paper. In the first model, we assume that while the seasonal demand is exogenous and stochastic, the end-of-season demand is endogenous and deterministic. The second model extends the first model by assuming that the end-of-season demand is endogenous and stochastic. Finally, the third model considers that both the seasonal and end-of-season demands are endogenous and stochastic. We have provided solution procedures for solving the stochastic optimization problems. We have also performed sensitivity analyses to assess the sensitivity of the optimal expected profit and order quantity to different problem parameters. Specifically, we have found that the optimal expected profit is most sensitive to the variable cost per unit, mean seasonal demand and market potential of end-of-season demand. Our models will be useful for retailers of products with a short selling season and a short end-of-season period for clearance sale of leftover inventory such that there is a single replenishment opportunity at the beginning of the season and a single opportunity for setting the salvage price for clearance sale based on the leftover inventory and end-of-season demand pattern. The paper is concluded with possible directions for future research.