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A maximum entropy approach to the newsvendor problem with partial information

Author

Listed:
  • Andersson, Jonas

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Jörnsten, Kurt

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Nonås, Sigrid Lise

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Sandal, Leif K.

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Ubøe, Jan

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

In this paper, we consider the newsvendor model under partial information, i.e., where the demand distribution D is partly unknown. We focus on the classical case where the retailer only knows the expectation and variance of D. The standard approach is then to determine the order quantity using conservative rules such as minimax regret or Scarf's rule. We compute instead the most likely demand distribution in the sense of maximum entropy. We then compare the performance of the maximum entropy approach with minimax regret and Scarf's rule on large samples of randomly drawn demand distributions. We show that the average performance of the maximum entropy approach is considerably better than either alternative, and more surprisingly, that it is in most cases a better hedge against bad results.

Suggested Citation

  • Andersson, Jonas & Jörnsten, Kurt & Nonås, Sigrid Lise & Sandal, Leif K. & Ubøe, Jan, 2011. "A maximum entropy approach to the newsvendor problem with partial information," Discussion Papers 2011/14, Norwegian School of Economics, Department of Business and Management Science.
  • Handle: RePEc:hhs:nhhfms:2011_014
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    File URL: http://hdl.handle.net/11250/164176
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    References listed on IDEAS

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    1. Jörnsten, Kurt & Lise Nonås, Sigrid & Sandal, Leif & Ubøe, Jan, 2012. "Transfer of risk in the newsvendor model with discrete demand," Omega, Elsevier, vol. 40(3), pages 404-414.
    2. Yingjie Lan & Michael O. Ball & Itir Z. Karaesmen, 2011. "Regret in Overbooking and Fare-Class Allocation for Single Leg," Manufacturing & Service Operations Management, INFORMS, vol. 13(2), pages 194-208, December.
    3. Lin, Jun & Ng, Tsan Sheng, 2011. "Robust multi-market newsvendor models with interval demand data," European Journal of Operational Research, Elsevier, vol. 212(2), pages 361-373, July.
    4. Sandal, Leif K. & Ubøe, Jan, 2012. "Stackelberg equilibria in a multiperiod vertical contracting model with uncertain and price-dependent demand," Discussion Papers 2012/2, Norwegian School of Economics, Department of Business and Management Science.
    5. Georgia Perakis & Guillaume Roels, 2010. "Robust Controls for Network Revenue Management," Manufacturing & Service Operations Management, INFORMS, vol. 12(1), pages 56-76, November.
    6. Lee, Chih-Ming & Hsu, Shu-Lu, 2011. "The effect of advertising on the distribution-free newsboy problem," International Journal of Production Economics, Elsevier, vol. 129(1), pages 217-224, January.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. repec:gam:jsusta:v:9:y:2017:i:6:p:1020-:d:101487 is not listed on IDEAS
    2. Fleischhacker, Adam J. & Fok, Pak-Wing, 2015. "On the relationship between entropy, demand uncertainty, and expected loss," European Journal of Operational Research, Elsevier, vol. 245(2), pages 623-628.
    3. Kamburowski, Jerzy, 2014. "The distribution-free newsboy problem under the worst-case and best-case scenarios," European Journal of Operational Research, Elsevier, vol. 237(1), pages 106-112.
    4. repec:spr:annopr:v:238:y:2016:i:1:d:10.1007_s10479-015-1995-1 is not listed on IDEAS
    5. repec:wsi:apjorx:v:34:y:2017:i:06:n:s0217595917500312 is not listed on IDEAS
    6. repec:eee:ejores:v:261:y:2017:i:3:p:880-892 is not listed on IDEAS
    7. Tao Wang & Jian-sheng Chen & Ting Wang & Shuang Wang, 2015. "Entropy weight-set pair analysis based on tracer techniques for dam leakage investigation," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 76(2), pages 747-767, March.

    More about this item

    Keywords

    Newsvendor model; entropy; partial information;

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General

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