In a recently accepted paper in Operations Research, Burak Kazaz, Steven R. Becker Professor of Supply Chain Management, Laura J. and L. Douglas Meredith Professor of Teaching Excellence and associate professor of supply chain at Syracuse University's Martin J. Whitman School of Management, and his co-author, Dr. Scott Webster (Arizona State University, formerly Syracuse University), analyze the economic tradeoffs associated with uncertain supply of a perishable product, reviewing how risk aversion and the source of uncertainty -- demand and/or supply -- affect supply chain decisions.
Their paper, titled "Technical note -- Price-setting newsvendor problems with uncertain supply and risk aversion," explores how economic decisions are affected by supply uncertainty. The researchers found that when risk aversion is incorporated into the joint price and quantity decision under uncertainty, it does not create structural problems when the source of uncertainty is demand. However, risk aversion creates significant problems when the source of uncertainty stems from supply fluctuations.
The authors develop a new elasticity measure that enables scholars to solve complex supply and demand problems. Managerially, their work finds that a firm will order more and price the commodity higher when the source of uncertainty is supply. The research builds on earlier studies that demonstrated that risk-averse firms price lower and order fewer items when the source of uncertainty is demand.
Materials provided by Whitman School of Management at Syracuse University. Note: Content may be edited for style and length.
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