Newsvendors with customer referrals

Abstract Firms often encourage existing customers to recruit new customers. In this paper, we analytically study the customer referrals in a two‐period newsvendor model, where the demand generated by referrals increases in the previous sales. In this framework, we establish the structural results for the optimal inventory level, as well as evaluate the value of referral programs. We find that the customer referrals are more attractive for firms selling nonperishable products than for those selling perishable products. Overall, this study underscores the operational value of customer referrals, particularly for firms selling nonperishable products.