Concepedia

Technical Note—A Risk-Averse Newsvendor Model Under the CVaR Criterion

Frank Chen, Minghui Xu, Zhe George Zhang

Operations Research · 2009 · 328 citations · 13 references

TL;DR

The classical risk‑neutral newsvendor problem seeks the order quantity that maximizes one‑period expected profit. The study investigates optimal pricing and ordering decisions for a risk‑averse newsvendor with stochastic price‑dependent demand. The authors use Conditional Value‑at‑Risk as the decision criterion and compare the resulting policy with risk‑neutral and utility‑based newsvendor models. The analysis establishes uniqueness and existence of optimal policies for additive and multiplicative demand models and demonstrates monotonicity and other characteristics of the optimal pricing and ordering decisions.

Abstract

The classical risk-neutral newsvendor problem is to decide the order quantity that maximizes the one-period expected profit. In this note, we consider a risk-averse newsvendor with stochastic price-dependent demand. We adopt Conditional Value-at-Risk (CVaR), a risk measure commonly used in finance, as the decision criterion. The aim of our study is to investigate the optimal pricing and ordering decisions in such a setting. For both additive and multiplicative demand models, we provide sufficient conditions for the uniqueness and existence of the optimal policy. Comparative statics show the monotonicity properties and other characteristics of the optimal pricing and ordering decisions. We also compare our results with those of the newsvendor with a risk-neutral attitude and a general utility function.