Conservative Profitability Evaluation for a Newsboy-Type Product: Frequentist Approach versus Bayesian Approach

Retailers in competitive markets must determine the optimal order quantity of the product while ensuring that the product keeps a stable performance of profitability. The achievable capacity index (ACI) has a streamlined form to measure the profitability of a newsboy-type product with normally distributed demand. In situations wherein the parameters of the normal distribution are unknown, it is also possible to estimate accurate ACI values using statistical approaches based on historical demand; however, the results tend to vary with the statistical approaches employed (e.g., frequentist or Bayesian). Furthermore, point estimates of ACI lead to overestimates of profitability due to sampling error. This study used frequentist and Bayesian approaches to derive the lower confidence bounds of ACI with the aim of obtaining conservative estimates of profitability. The comparison of the levels of conservatism and confidence between the two approaches was also explored. Our results could be used as a guide for the selection of approaches by which to estimate profitability.