The price-setting newsvendor problem, which models the economic trade-offs associated with uncertain demand of a perishable product, is fundamental to supply chain analysis. However, in settings such as agriculture, there is significant economic risk associated with supply uncertainty. We analyze how risk aversion and the source of uncertainty - demand and/or supply - affect tractability and optimal decisions. We find that concavity of the objective function is preserved under the introduction of risk aversion if the source of uncertainty is demand, but it is not necessarily preserved if the source of uncertainty is supply. We identify a structural difference that explains this result, and show that this difference can lead to opposing directional effects of risk aversion on optimal decisions.
ASJC Scopus subject areas
- Computer Science Applications
- Management Science and Operations Research