Socially Responsible Newsvendor
38 Pages Posted: 2 Apr 2021 Last revised: 20 Sep 2021
Date Written: March 16, 2021
We consider a socially responsible firm that is concerned with its profit as well as consumer surplus, following the preference of pro-social executives, consumer activists, activist shareholders, or a government shareholder. Specifically, we study the decisions faced by a newsvendor whose objective is modeled as a weighted average of the expected profit and consumer surplus, with the weight on consumer surplus referred to as the corporate social responsibility (CSR) level. Our model includes the pure profit-maximizing and non-profit firms 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 socially conscious executives (resp., the government as a shareholder) would face less resistance from the firm's general shareholders (resp., the firm) when imposing a lower CSR level, yet with which it enjoys a more significant improvement in boosting consumer surplus at the cost of a marginal profit loss by the firm, in both relative and absolute terms. We also provide demand-distribution-free guarantees on the performance of enduring profit loss in exchange for consumer surplus achieved by a CSR level. Moreover, we show that the same level of demand variability has a less negative impact on the firm's objective when its CSR level is higher; under normal demand, with a little CSR, such a negative impact has a larger reduction for a product with a higher coefficient of variation or a lower critical ratio. Finally, one of our numerical studies using practical data demonstrates that for an influenza vaccine of Afluria Quadrivalent, a CSR level of 10\% enables the firm to improve consumer surplus by 17.8\% (of the maximum improvement) at the expense of a profit loss of only 1.2\% (of the maximum loss) for a typical demand's coefficient of variation level of $0.4$. Our results imply and quantify the managerial insight that a little CSR can go a long way, which holds robustly in a variety of forms and senses for the newsvendor setting.
Keywords: newsvendor, corporate social responsibility, consumer surplus
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