A high-low search algorithm for a newsboy problem with delayed information feedback

This paper outlines a new approach to the problem of demand uncertainty. It deals with setting optimal supply levels when demand is unknown. The novel feature of this approach is that information is obtained by observing sales. This information is used to determine future supply levels. Thus, supply levels are chosen with a view to current profit and future information. The technical apparatus is based on an extension of the theory of high-low search. We derive an algorithm to determine a sequence of supply quantities which minimizes total costs of over- and undersupply in the most adverse demand conditions. We calculate the value of perfect information, indicating how much a rational risk averse decision maker would be willing to pay to know demand exactly.