Stochastic Stackelberg equilibria with applications to time-dependent newsvendor models

Abstract

In this paper, we prove a maximum principle for general stochastic differential Stackelberg games, and apply the theory to continuous time newsvendor problems. In the newsvendor problem, a manufacturer sells goods to a retailer, and the objective of both parties is to maximize expected profits under a random demand rate. Our demand rate is an Itô–Lévy process, and to increase realism information is delayed, e.g., due to production time. A special feature of our time-continuous model is that it allows for a price-dependent demand, thereby opening for strategies where pricing is used to manipulate the demand.