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

Author

Listed:
  • Youhua (Frank) Chen

    () (Department of Systems Engineering and Engineering Management, Chinese University of Hong Kong, Shatin, N.T., Hong Kong)

  • Minghui Xu

    () (School of Economics and Management, Wuhan University, Wuhan 430072, China)

  • Zhe George Zhang

    () (Department of Decision Science, Western Washington University, Bellingham, Washington 98225, and Faculty of Business Administration, Simon Fraser University, Burnaby, British Columbia, Canada V5A 1S6)

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.

Suggested Citation

  • Youhua (Frank) Chen & Minghui Xu & Zhe George Zhang, 2009. "Technical Note---A Risk-Averse Newsvendor Model Under the CVaR Criterion," Operations Research, INFORMS, vol. 57(4), pages 1040-1044, August.
  • Handle: RePEc:inm:oropre:v:57:y:2009:i:4:p:1040-1044
    DOI: 10.1287/opre.1080.0603
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    File URL: http://dx.doi.org/10.1287/opre.1080.0603
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    References listed on IDEAS

    as
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    7. Vipul Agrawal & Sridhar Seshadri, 2000. "Impact of Uncertainty and Risk Aversion on Price and Order Quantity in the Newsvendor Problem," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 410-423, July.
    8. Wedad Elmaghraby & P{i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
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