A Maximum Entropy Approach to the Newsvendor Problem with Partial Information

31 Pages Posted: 30 Sep 2011

See all articles by Jonas Andersson

Jonas Andersson

Norwegian School of Economics (NHH) - Department of Business and Management Science

Kurt Jornsten

Norwegian School of Economics (NHH) - Department of Business and Management Science

Sigrid Lise Nonas

Norwegian School of Economics (NHH) - Department of Business and Management Science

Leif Kristoffer Sandal

Norwegian School of Economics (NHH) - Department of Business and Management Science

Jan Uboe

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: August 31, 2011

Abstract

In this paper, we consider the newsvendor model under partial information, i.e., where the demand distribution D is partly unknown. We focus on the classical case where the retailer only knows the expectation and variance of D. The standard approach is then to determine the order quantity using conservative rules such as minimax regret or Scarf's rule. We compute instead the most likely demand distribution in the sense of maximum entropy. We then compare the performance of the maximum entropy approach with minimax regret and Scarf's rule on large samples of randomly drawn demand distributions. We show that the average performance of the maximum entropy approach is considerably better than either alternative, and more surprisingly, that it is in most cases a better hedge against bad results.

Suggested Citation

Andersson, Jonas and Jornsten, Kurt and Nonas, Sigrid Lise and Sandal, Leif Kristoffer and Uboe, Jan, A Maximum Entropy Approach to the Newsvendor Problem with Partial Information (August 31, 2011). NHH Dept. of Finance & Management Science Discussion Paper No. 2011/14. Available at SSRN: https://ssrn.com/abstract=1935906 or http://dx.doi.org/10.2139/ssrn.1935906

Jonas Andersson

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Kurt Jornsten

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Sigrid Lise Nonas

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Leif Kristoffer Sandal

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 95 93 41 (Phone)

Jan Uboe (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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