Mixed Contracts for the Newsvendor Problem with Real Options

29 Pages Posted: 12 Apr 2011

See all articles by Kurt Jornsten

Kurt Jornsten

Norwegian School of Economics (NHH) - Department of Business and Management Science

Sigrid Lise Nonas

Norwegian School of Economics (NHH) - Department of Business and Management Science

Leif Kristoffer Sandal

Norwegian School of Economics (NHH) - Department of Business and Management Science

Jan Uboe

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: April 6, 2011

Abstract

In this paper we consider the newsvendor model with real options. We consider a mixed contract where the retailer can order a combination of q units subject to the conditions in a classical newsvendor contract and Q real options on the same items. We provide a closed form solution to this mixed contract when the demand is discrete and study some of its properties. We also offer an explicit solution for the continuous case. In particular we demonstrate that a mixed contract may be superior to a real option contract when a manufacturer has a bound on how much variance she is willing to accept.

Suggested Citation

Jornsten, Kurt and Nonas, Sigrid Lise and Sandal, Leif Kristoffer and Uboe, Jan, Mixed Contracts for the Newsvendor Problem with Real Options (April 6, 2011). NHH Dept. of Finance & Management Science Discussion Paper No. 2011/6. Available at SSRN: https://ssrn.com/abstract=1805625 or http://dx.doi.org/10.2139/ssrn.1805625

Kurt Jornsten

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Sigrid Lise Nonas

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Leif Kristoffer Sandal

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 95 93 41 (Phone)

Jan Uboe (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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