Demand Uncertainty and Supplier´s Buybacks in the Price Dependent Newsvendor Model

The paper considers a price dependent newsvendor model where a risk-neutral supplier sells its product to a risk-neutral retailer facing price dependent consumers. Consumers´ demand formulation is derived from micromodeling of consumer utility functions and captures demand uncertainty regarding two parameters: market size and price sensitivity. The paper analyzes how the nature of demand uncertainty affects decisions of the supplier and the retailer. Furthermore the supplier may induce the retailer facing uncertain demand to carry ample stocks of their products by agreeing to buy back unsold goods for credit. The paper considers under which condition a buyback contract can be offered by the supplier to validly coordinate the newsvendor model and under which condition a buy back contract cannot be adopted to deal with the channel conflict induced by uncertainty