Risk-Averse Newsboy Problem with Incomplete Demand Information

Abstract

In the traditional inventory management literature, it is a quite common assumption that the probability distribution of stochastic demand is completely known to the decision maker. However, in reality, there are ample evidences where the demand distribution is not known with certainty. In order to cope with the practical situation, it is, therefore, necessary to investigate inventory models with available incomplete information. This chapter is aimed to study a simple single-period newsboy problem in which the decision maker is risk-averse and the demand information is not perfectly known to him/her. We derive a forecast cost for the period based on sample observation used to set the value of an unknown parameter of the distribution. We analyze the significance of risk aversion on the optimal decisions. From numerical study, we observe that the expected forecast cost increases when less information about demand is available and that the risk-averse inventory manager incurs higher cost than risk-neutral manager.