The effect of advertising on the distribution-free newsboy problem

Advertising is very important for the newsboy problem because the shelf-life of the newsboy product is short and advertising may increase sales to avoid overstocking. In this paper, models to study the effect of advertising are developed for the distribution-free newsboy problem where only the mean and variance of the demand are known. As in Khouja and Robbins (2003), it is assumed that the mean demand is an increasing and concave function of advertising expenditure. Three cases are considered: (1) demand has constant variance, (2) demand has constant coefficient of variation, and (3) demand has an increasing coefficient of variation. This paper provides closed-form solutions or steps to solve the problem. Numerical results of the model are also compared with those from other papers. The effects of model parameters on optimal expenditure on advertising, optimal order quantity, and the lower bound on expected profit are derived or discussed.