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

Department of Systems Engineering and Engineering Management, Chinese University of Hong Kong, Shatin, N.T., Hong Kong
School of Economics and Management, Wuhan University, Wuhan 430072, China
Department of Decision Science, Western Washington University, Bellingham, Washington 98225, and Faculty of Business Administration, Simon Fraser University, Burnaby, British Columbia, Canada V5A 1S6
yhchen{at}se.cuhk.edu.hk
xu_mingh{at}yahoo.com.cn
george.zhang{at}wwu.edu

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.

Subject classifications: inventory; risk; perishable/aging items; marketing; pricing.
History: Received December 2006; revision received February 2008; accepted March 2008.