A Bayesian approach to determine the value of information in the newsboy problem

Chih-Ming Lee

International Journal of Production Economics, 2008, vol. 112, issue 1, 391-402

Abstract: The potential benefits of demand forecasting in a newsboy problem are to decrease the risk of overstocking or shortage, but forecasting is usually not free. In this paper, a model to help the decision-maker in a newsboy problem to assess the value of information is presented. First, two cases on available demand information are considered to develop an upper bound of the cost that the decision-maker would spend on forecasting. Then, a Bayesian approach to forecasting is proposed and EVAI, the expected value of additional information, is computed to help the decision-maker in deciding whether to use the extra information. Finally, the relationship between the EVAI and model parameters is discussed.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:112:y:2008:i:1:p:391-402

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