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Structural Estimation of the Newsvendor Model: An Application to Reserving Operating Room Time

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Author Info

  • Marcelo Olivares

    ()
    (Columbia Business School, New York, New York 10027)

  • Christian Terwiesch

    ()
    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Lydia Cassorla

    ()
    (Department of Anesthesia and Perioperative Care, University of California, San Francisco, California 94143)

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    Abstract

    The newsvendor model captures the trade-off faced by a decision maker that needs to place a firm bet prior to the occurrence of a random event. Previous research in operations management has mostly focused on deriving the decision that minimizes the expected mismatch costs. In contrast, we present two methods that estimate the unobservable cost parameters characterizing the mismatch cost function. We present a structural estimation framework that accounts for heterogeneity in the uncertainty faced by the newsvendor as well as in the cost parameters. We develop statistical methods that give consistent estimates of the model primitives, and derive their asymptotic distribution, which is useful to do hypothesis testing. We apply our econometric model to a hospital that balances the costs of reserving too much versus too little operating room capacity to cardiac surgery cases. Our results reveal that the hospital places more emphasis on the tangible costs of having idle capacity than on the costs of schedule overrun and long working hours for the staff. We also extend our structural models to incorporate external information on forecasting biases and mismatch costs reported by the medical literature. Our analysis suggests that overconfidence and incentive conflicts are important drivers of the frequency of schedule overruns observed in our sample.

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    File URL: http://dx.doi.org/10.1287/mnsc.1070.0756
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 54 (2008)
    Issue (Month): 1 (January)
    Pages: 41-55

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    Handle: RePEc:inm:ormnsc:v:54:y:2008:i:1:p:41-55

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    Related research

    Keywords: newsvendor model; empirical research; health care; structural estimation; operating room reservation;

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    Citations

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    Cited by:
    1. Halkos, George & Kevork, Ilias, 2012. "Evaluating alternative estimators for optimal order quantities in the newsvendor model with skewed demand," MPRA Paper 36205, University Library of Munich, Germany.
    2. Elahi, Ehsan & Lamba, Narasimha & Ramaswamy, Chinthana, 2013. "How can we improve the performance of supply chain contracts? An experimental study," International Journal of Production Economics, Elsevier, vol. 142(1), pages 146-157.
    3. Schiffels, Sebastian & F├╝gener, Andreas & Kolisch, Rainer & Jens Brunner, O., 2014. "On the assessment of costs in a newsvendor environment: Insights from an experimental study," Omega, Elsevier, vol. 43(C), pages 1-8.
    4. Francesca Guerriero & Rosita Guido, 2011. "Operational research in the management of the operating theatre: a survey," Health Care Management Science, Springer, vol. 14(1), pages 89-114, March.
    5. Halkos, George & Kevork, Ilias, 2012. "Validity and precision of estimates in the classical newsvendor model with exponential and rayleigh demand," MPRA Paper 36460, University Library of Munich, Germany.
    6. Soonhui Lee & Tito Homem-de-Mello & Anton Kleywegt, 2012. "Newsvendor-type models with decision-dependent uncertainty," Computational Statistics, Springer, vol. 76(2), pages 189-221, October.
    7. Halkos, George & Kevork, Ilias, 2012. "Unbiased estimation of maximum expected profits in the Newsvendor Model: a case study analysis," MPRA Paper 40724, University Library of Munich, Germany.
    8. Choi, Sangdo & Wilhelm, Wilbert E., 2014. "An approach to optimize block surgical schedules," European Journal of Operational Research, Elsevier, vol. 235(1), pages 138-148.

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