Expected Value of Distribution Information for the Newsvendor Problem

Authors:
Jinfeng Yue;Bintong Chen;Min-Chiang Wang
Affiliations:
Department of Management and Marketing, Jennings A. Jones College of Business, Middle Tennessee State University, Murfreesboro, Tennessee 37132;Department of Management and Operations, College of Business and Economics, Washington State University, Pullman, Washington 99164-4736;Department of Management and Operations, College of Business and Economics, Washington State University, Pullman, Washington 99164-4736
Venue:
Operations Research
Year:
2006

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Abstract

This paper extends previous work on the distribution-free newsvendor problem, where only partial information about the demand distribution is available. More specifically, the analysis assumes that the demand distribution f belongs to a class of probability distribution functions (pdf) F with mean μ and standard deviation σ. While previous work has examined the expected value of distribution information (EVDI) for a particular order quantity and a particular pdf f, this paper aims at computing the maximum EVDI over all f ∈ F for any order quantity. In addition, an optimization procedure is provided to calculate the order quantity that minimizes the maximum EVDI.