Influencing Market Choice with
Advertising in a Newsvendor Setting1
Kevin Taaffe
Department of Industrial Engineering
We
consider a firm that markets and delivers a product for a single selling
season. The net revenue that can be extracted
for the good varies by market, as does the market demand. The firm has the flexibility to choose which
markets it will serve, which will drive its order quantity decision with its
supplier. Given long procurement lead times, however, these market selections
must be made long before actual demand for the product is realized. Assuming no lost sales, any demand not
satisfied through this order will be contracted to a high-cost local supplier. The firm can also influence the choice of
markets by expending advertising effort in selected markets. We develop a profit maximizing model to
examine the relationship between advertising, market selection, and product
ordering decisions. Using this model, we offer solution approaches to this
so-called selective newsvendor problem for cases in which the firm operates
with either a limited or unlimited advertising budget.
1Joint work with Joseph Geunes and H. Edwin Romeijn,
Department of Industrial and Systems Engineering,