Technical Note---A Risk- and Ambiguity-Averse Extension of the Max-Min Newsvendor Order Formula

Qiaoming Han (), Donglei Du () and Luis F. Zuluaga ()
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Qiaoming Han: International Center of Management Science and Engineering, Nanjing University, Jiangsu 210093, China; and School of Mathematics and Statistics, Zhejiang University of Finance and Economics, Hangzhou 310018, China
Donglei Du: University of New Brunswick, Fredericton, New Brunswick E3B 5A3, Canada
Luis F. Zuluaga: Department of Industrial and Systems Engineering, Lehigh University, Bethlehem, Pennsylvania 18015

Operations Research, 2014, vol. 62, issue 3, 535-542

Abstract: Scarf's max-min order formula for the risk-neutral and ambiguity-averse newsvendor problem is a classical result in the field of inventory management. In this article, we extend Scarf's formula by deriving an analogous closed-form order formula for the risk - and ambiguity - averse newsvendor problem. Specifically, we provide and analyze the newsvendor order quantity that maximizes the worst-case expected profit versus risk trade-off (risk-averse) when only the mean and standard deviation of the product's demand distribution are known (ambiguity-averse), and the risk is measured by the standard deviation of the newsvendor's profit. We provide both analytical and numerical results to illustrate the combined effect of considering risk aversion and ambiguity aversion in computing the newsvendor order.

Keywords: distributionally robust; newsvendor; risk averse; ambiguity averse; max-min rule (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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