-

 

 

 




Optimization Online





 

Asymmetry and Ambiguity in Newsvendor Models

Karthik Natarajan(matkbn***at***nus.edu.sg)
Melvyn Sim(dscsimm***at***nus.edu.sg)
Joline Uichanco(joline.uichanco***at***gmail.com)

Abstract: The traditional decision-making framework for newsvendor models is to assume a distribution of the underlying demand. However, the resulting optimal policy is typically sensitive to the choice of the distribution. A more conservative approach is to assume that the distribution belongs to a set parameterized by a few known moments. An ambiguity-averse newsvendor would choose to maximize the worst-case profit. Most models of this type assume that only the mean and the variance are known, but do not attempt to include asymmetry properties of the distribution. Other recent models address asymmetry by including skewness and kurtosis. However, closed-form expressions on the optimal bounds are difficult to find for such models. In this paper, we propose a framework under which the expectation of a piecewise linear objective function is optimized over a set of distributions with known asymmetry properties. This asymmetry is represented by the first two moments of multiple random variables that result from partitioning the original distribution. In the simplest case, this reduces to semivariance. The optimal bounds can be solved through a second-order cone programming (SOCP) problem. This framework can be applied to the risk-averse and risk-neutral newsvendor problems and option pricing. We provide a closed-form expression for the worst-case newsvendor profit with only mean, variance and semivariance information.

Keywords: newsvendor model; asymmetry; semivariance; ambiguity averse; risk averse

Category 1: Robust Optimization

Citation:

Download: [PDF]

Entry Submitted: 07/11/2008
Entry Accepted: 07/11/2008
Entry Last Modified: 07/11/2008

Modify/Update this entry


  Visitors Authors More about us Links
  Subscribe, Unsubscribe
Digest Archive
Search, Browse the Repository

 

Submit
Update
Policies
Coordinator's Board
Classification Scheme
Credits
Give us feedback
Optimization Journals, Sites, Societies
Mathematical Programming Society