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

Sungyong Choi, Andrzej Ruszczyński

Research output: Contribution to journalArticlepeer-review

63 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)78-84
Number of pages7
JournalEuropean Journal of Operational Research
Volume214
Issue number1
DOIs
StatePublished - Oct 1 2011

All Science Journal Classification (ASJC) codes

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

Keywords

  • Expected utility theory
  • Risk analysis
  • Supply chain management

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