The price-setting limited clearance sale inventory model

The classical newsvendor problem decides the optimal order quantity for a single period, with the assumptions that both the selling price and the end of period salvage value are fixed. However, the salvage value or clearance price in many instances depends on the leftover inventory. A fixed salvage value assumption could lead to suboptimal decisions in many situations. In this paper we determine the optimal pricing and ordering decision for a limited clearance sale inventory model using newsvendor framework with variable salvage value. We consider additive demand model, provide necessary and sufficient conditions for unique pricing and ordering policies, and calculate optimal contract parameters for wholesale price contract in decentralized supply chain setting. We compare our results against classical newsvendor model with fixed salvage value. We analytically prove that the price-setting limited clearance sale inventory model improves the ordering decision and profit level.