Single period, single product newsvendor model with random supply shock

In order to investigate the efficiency of policies made by the industrial administration office (IAO for short) so as to keep market order, the authors propose a shocked inventory model of one product with both genuine and counterfeit qualities. The checking policies made by the IAO are considered to be a random shock for the inventory model by examination of the qualities of the products, which will expropriate the counterfeit products. The paper makes two contributions. First, while discussing several conditions, the authors provide a basic theory, which is a kind of extension of the newsvendor problem, and prove some properties of the optimal policies for the shocked inventory model with a fixed random checking rate. Second, the authors give some recommendations as to how the IAO can formulate its checking policies. An example demonstrates the relationship between checking policies and optimal inventory policies. © 2003 Elsevier B.V. All rights reserved.