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A Multi-Product Risk-Averse Newsvendor with Exponential Utility Function

Sungyong Choi (sungyongchoi***at***gmail.com)
Andrzej Ruszczynski (rusz***at***business.rutgers.edu)

Abstract: We consider a multi-product newsvendor using an exponential utility function. We first establish a few basic properties for the newsvendor regarding the convexity of the model and monotonicity of the impact of risk aversion on the solution. When the product demands are independent and the ratio of the degree of risk aversion to the number of products is sufficiently small, we obtain closed-form approximations of the optimal order quantities. The approximations are as easy to compute as the risk-neutral solution. We prove that when this ratio approaches zero, the risk-averse solution converges to the corresponding risk-neutral solution. When the product demands are positively (negatively) correlated, we show that risk aversion leads to lower (higher) optimal order quantities than the solution with independent demands. Using a numerical study, we examine convergence rates of the approximations and thoroughly study the interplay of demand correlation and risk aversion. The numerical study confirms our analytical results and further shows that an increased risk aversion does not always lead to lower order quantities, when demands are strongly negatively correlated.

Keywords: Supply chain management, risk analysis, expected utility theory

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

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

Citation: Author 1: Nanyang Technological University, Division of Systems and Engineering Management, 50 Nanyang Avenue, Singapore 639798; Author 2: Rutgers University, Department of Management Science and Information Systems, 94 Rockefeller Road, Piscataway, New Jersey 08854;

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Entry Submitted: 04/14/2011
Entry Accepted: 04/14/2011
Entry Last Modified: 04/14/2011

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