Title: The risk averse newsvendor problem from rank-dependent expected utility approach

Authors: Jiangfeng Li; Weifang Liu; Jinliang Wang; Shunming Zhang

Addresses: School of Mathematical Science, Xiamen University, Xiamen, Fujian, 361005, China; School of Science, Jiujiang University, Jiujiang, Jiangxi, 332005, China ' School of Economics, Xiamen University, Xiamen, Fujian, 361005, China ' School of Science, Jiujiang University, Jiujiang, Jiangxi, 332005, China ' School of Finance, Renmin University of China, Beijing, 100872, China

Abstract: This paper examines the single-period newsvendor problem where the risk averse newsvendor with rank-dependent expected utility (RDEU) determines the optimal order of newspapers for sale. Compared with the expected-utility (EU) newsvendor model, the effect of risk averse under RDEU on optimal order quantity is more significant and a closed-form solution is derived for dual-utility (DU) theory. The optimal order for RDEU newsvender is less than that for DU one. It follows that the optimal order for EU newsvender is less than that for expected-profit (EP) one. On the other hand, the optimal order for RDEU newsvender is less than that for EU one. In particular, the optimal order for DU newsvender is less than that for EP one. Effect of changes in risk aversion degree is also explored.

Keywords: risk aversion; risk averse newsvendor problem; rank-dependent expected utility; RDEU; distortion function; optimal orders.

DOI: 10.1504/IJOR.2014.062457

International Journal of Operational Research, 2014 Vol.20 No.3, pp.262 - 282

Received: 03 Feb 2012
Accepted: 26 Nov 2012
Published online: 21 Jun 2014 *

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