TY - JOUR

T1 - A multi-product risk-averse newsvendor with exponential utility function

AU - Choi, Sungyong

AU - Ruszczyński, Andrzej

N1 - Funding Information:
The research was partially supported by the NSF Award CMMI- 0965689 . The authors are very grateful to three anonymous Referees for their comments and suggestions that lead to significant improvements of the manuscript.

PY - 2011/10/1

Y1 - 2011/10/1

N2 - 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.

AB - 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.

KW - Expected utility theory

KW - Risk analysis

KW - Supply chain management

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U2 - 10.1016/j.ejor.2011.04.005

DO - 10.1016/j.ejor.2011.04.005

M3 - Article

AN - SCOPUS:79957981219

VL - 214

SP - 78

EP - 84

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 1

ER -