Optimal pricing and stocking decisions for newsvendor problem with value-at-risk consideration

Authors:
Chun-Hung Chiu;Tsan-Ming Choi
Affiliations:
Institute of Textiles and Clothing, Faculty of Applied Science and Textiles, The Hong Kong Polytechnic University, Hung Hom, Hong Kong;Institute of Textiles and Clothing, Faculty of Applied Science and Textiles, The Hong Kong Polytechnic University, Hung Hom, Hong Kong
Venue:
IEEE Transactions on Systems, Man, and Cybernetics, Part A: Systems and Humans - Special issue on model-based diagnostics
Year:
2010

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Abstract

Motivated by the popularity of VaR measure in financial applications, we study the classical newsvendor problem with Value-at-Risk (VaR) consideration and price-dependent demands. We first investigate the problem's structural properties and derive analytically the optimal joint stocking and pricing decisions. We then explore the difference between the optimal decisions under the VaR formulation and the classical expected profit-maximization model. Finally, we reveal an interesting analytical relationship between the inventory service level and the VaR measure. Insights are generated.