A Multi-Product Risk-Averse Newsvendor with Law Invariant Coherent Measures of Risk

Sungyong Choi(sungyongandromeda.rutgers.edu)
Andrzej Ruszczyński(ruszbusiness.rutgers.edu)
Yao Zhao(yaozhaoandromeda.rutgers.edu)

Abstract: We consider a multi-product newsvendor under the law-invariant coherent risk measures. We first establish a few fundamental properties of the model regarding the convexity of the problem, the symmetry of the solution and the impact of risk aversion. Specifically, we show that for identical products with independent demands, increased risk aversion leads to decreased orders. For a large but finite number of heterogenous products with independent demands, we derive closed-form approximations for the optimal order quantities. The approximations are as simple to compute as the classical risk-neutral solutions. We also show that the risk-neutral solution is asymptotically optimal as the number of products tends to infinity, and thus risk aversion has no impact in the limit. For a risk-averse two-product newsvendor with dependent demands, we show that positively (negatively) dependent demands lead to a lower (higher) optimal order quantities than independent demands. Using a numerical study, we examine the convergence rates of the approximations and develop additional insights on the interplay of dependent demands and risk aversion.

Keywords: Multiple products, newsvendor, risk averse, coherent risk measure, diversification

Category 1: Applications -- OR and Management Sciences (Supply Chain Management )

Category 2: Applications -- OR and Management Sciences (Production and Logistics )

Citation: OPRE-2009-01-023, Operations Research, 10/2009

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Entry Submitted: 11/25/2009
Entry Accepted: 11/25/2009
Entry Last Modified: 11/25/2009

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