On the relationship between entropy, demand uncertainty, and expected loss

Adam J. Fleischhacker and Pak-Wing Fok

European Journal of Operational Research, 2015, vol. 245, issue 2, 623-628

Abstract: We analyze the effect of demand uncertainty, as measured by entropy, on expected costs in a stochastic inventory model. Existing models studying demand variability’s impact use either stochastic ordering techniques or use variance as a measure of uncertainty. Due to both axiomatic appeal and recent use of entropy in the operations management literature, this paper develops entropy’s use as a demand uncertainty measure. Our key contribution is an insightful proof quantifying how costs are non-increasing when entropy is reduced.

Keywords: Entropy; Measuring demand uncertainty; Stochastic inventory models; Demand variability (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:245:y:2015:i:2:p:623-628

DOI: 10.1016/j.ejor.2015.03.014

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