The risk-averse newsvendor problem with random capacity

Meng Wu, Stuart X. Zhu and Ruud H. Teunter

European Journal of Operational Research, 2013, vol. 231, issue 2, 328-336

Abstract: We study the effect of capacity uncertainty on the inventory decisions of a risk-averse newsvendor. We consider two well-known risk criteria, namely Value-at-Risk (VaR) included as a constraint and Conditional Value-at-Risk (CVaR). For the risk-neutral newsvendor, we find that the optimal order quantity is not affected by the capacity uncertainty. However, this result does not hold for the risk-averse newsvendor problem. Specifically, we find that capacity uncertainty decreases the order quantity under the CVaR criterion. Under the VaR constraint, capacity uncertainty leads to an order decrease for low confidence levels, but to an order increase for high confidence levels. This implies that the risk criterion should be carefully selected as it has an important effect on inventory decisions. This is shown for the newsvendor problem, but is also likely to hold for other inventory control problems that future research can address.

Keywords: Conditional Value-at-Risk; Value-at-Risk; Newsvendor problem; Capacity uncertainty (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:231:y:2013:i:2:p:328-336

DOI: 10.1016/j.ejor.2013.05.044

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