Scandinavian Working Papers in Economics
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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2011/6:
Mixed contracts for the newsvendor problem with real options

Kurt Jörnsten (), Sigrid Lise Nonås (), Leif K. Sandal () and Jan Ubøe ()

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.

Keywords: Newsvendor model; real options; discrete demand; mixed contract; (follow links to similar papers)

JEL-Codes: C70; D86; (follow links to similar papers)

28 pages, April 6, 2011

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