Technical note - Price-setting newsvendor problems with uncertain supply and risk aversion

Burak Kazaz, Scott Webster

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

The price-setting newsvendor problem, which models the economic trade-offs associated with uncertain demand of a perishable product, is fundamental to supply chain analysis. However, in settings such as agriculture, there is significant economic risk associated with supply uncertainty. We analyze how risk aversion and the source of uncertainty - demand and/or supply - affect tractability and optimal decisions. We find that concavity of the objective function is preserved under the introduction of risk aversion if the source of uncertainty is demand, but it is not necessarily preserved if the source of uncertainty is supply. We identify a structural difference that explains this result, and show that this difference can lead to opposing directional effects of risk aversion on optimal decisions.

Original languageEnglish (US)
Pages (from-to)807-811
Number of pages5
JournalOperations Research
Volume63
Issue number4
DOIs
StatePublished - Jul 1 2015

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Economics
Agriculture
Supply chains
Price setting
Risk aversion
Newsvendor problem
Uncertainty
Perishable products
Uncertain demand
Concavity
Trade-offs
Supply chain
Objective function
Demand uncertainty
Supply uncertainty
Economic risk

ASJC Scopus subject areas

  • Computer Science Applications
  • Management Science and Operations Research

Cite this

Technical note - Price-setting newsvendor problems with uncertain supply and risk aversion. / Kazaz, Burak; Webster, Scott.

In: Operations Research, Vol. 63, No. 4, 01.07.2015, p. 807-811.

Research output: Contribution to journalArticle

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