How larger demand variability may lead to lower costs in the newsvendor problem

How larger demand variability may lead to lower costs in the newsvendor problem

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Article ID: iaor2000659
Country: United States
Volume: 46
Issue: 6
Start Page Number: 934
End Page Number: 936
Publication Date: Nov 1998
Journal: Operations Research
Authors: , ,
Keywords: probability
Abstract:

In this paper we consider the Newsvendor Problem. Intuition may lead to the hypothesis that in this stochastic inventory problem a high demand variability results in larger variances and in higher costs. In a recent paper, Song has proved that the intuition is correct for many demand distributions that are commonly used in practice, such as for the normal distribution function. However, this paper shows that there exist demand distributions for which the intuition is misleading, i.e., for which larger variances occur in combination with lower costs. To characterize these demand distributions we use stochastic dominance relations.

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