How Larger Demand Variability May Lead to Lower Costs in the Newsvendor Problem

Ad Ridder, Erwin van der Laan and Marc Salomon
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Ad Ridder: Vrije Universiteit Amsterdam, Amsterdam, The Netherlands
Marc Salomon: Tilburg University, Tilburg, The Netherlands

Operations Research, 1998, vol. 46, issue 6, 934-936

Abstract: In this paper we consider the Newsvendor Problem. Intuition may lead to the hypothesis that in this stochastic inventory problem a higher demand variability results in larger variances and in higher costs. In a recent paper, Song (1994a) has proved that the intuition is correct for many demand distributions that are commonly used in practice, such as for the normal distribution function. However, this paper shows that there exist demand distributions for which the intuition is misleading, i.e., for which larger variances occur in combination with lower costs. To characterize these demand distributions we use stochastic dominance relations.

Keywords: Inventory/production; stochastic uncertainty; Probability; distribution comparisons (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (21)

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