Socially Responsible Newsvendor
Posted: 2 Apr 2021
Date Written: March 16, 2021
We consider a socially responsible firm that complies with the regulation of a government or regulatory body and concerns its profit as well as consumer surplus. Specifically, we study the decisions faced by a risk-neutral newsvendor whose objective is modeled as a weighted average of the expected profit and consumer surplus, with the weight on the consumer surplus referred to as Corporate Social Responsibility (CSR) level. Therefore, the model includes the pure profit-maximizing and non-profit scenarios as two extreme cases. We study the firm's optimal inventory decision in the base model and the optimal joint price and inventory decisions in an extension. Our results show that the regulator faces less resistance from the firm to impose a lower CSR level, with which it enjoys more significant improvement in boosting consumer surplus at the cost of a marginal profit loss by the firm. Moreover, the government regulation on the CSR level can help the firm to mitigate the mismatch cost induced by demand uncertainty, more so for those firms who face higher demand variability or a lower critical ratio of the product. Our numerical results based on an influenza vaccine, Afluria Quadrivalent, demonstrate that a CSR level of 10% enables firms to improve consumer surplus by 17.8% (of the maximum possible improvement) only at the expense of a profit loss of 1.2% (of the maximum possible loss) for a typical demand CV (coefficient of variance) level of 0.4.
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