An analysis on the marketing budget of a newsvendor

Abstract

Firms allocate budget for marketing related expenditures to boost the demand or to reduce the uncertainty in the demand. We study the characterization of optimal budget allocation of a newsvendor who has to decide on these expenditures together with the production quantity. It can increase the demand through advertising and reduce the uncertainty through a market research. We study three cases. First, we study an unlimited budget case where the advertising does not affect the variance of the demand. Then we study the same setting under limited budget. Last, we model the variance to be dependent also on advertising expenditure. In terms of demand distribution, we analyze normal distribution and uniform distribution. We also study distribution-free demand case. We show that a newsvendor should allocate higher advertising budget to profitable products and higher market research budget to products with higher costs.