A Risk-Averse Newsvendor Model under CVaR Decision Criterion

Abstract

The classical risk-neutral newsvendor problem is to decide the order quantity to maximize the one period expected pro.t under a given demand distribution. In this paper we consider a risk-averse newsvendor with a stochastic price-dependent demand. We use the 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 inventory decisions in such a setting. For both additive and multiplicative demand models, we provide sufficient conditions for the uniqueness and the existence of the optimal policy. Performing comparative statics shows the monotonicity properties and other characteristics of the optimal pricing and ordering decisions. We also made comparisons between our results and those of risk-neutral newsvendor. Numerical examples are presented to gain more insights about the risk-averse decision making behavior.

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