On the heavy-tail behavior of the distributionally robust newsvendor

DOI10.1287/OPRE.2020.2091zbMATH Open1482.90010arXiv1806.05379OpenAlexW3160301121MaRDI QIDQ5031607FDOQ5031607

Authors: Bikramjit Das, Anulekha Dhara, Karthik Natarajan 

Publication date: 16 February 2022

Published in: Operations Research (Search for Journal in Brave)

Abstract: Since the seminal work of Scarf (1958) [A min-max solution of an inventory problem, Studies in the Mathematical Theory of Inventory and Production, pages 201-209] on the newsvendor problem with ambiguity in the demand distribution, there has been a growing interest in the study of the distributionally robust newsvendor problem. The model is criticized at times for being overly conservative since the worst-case distribution is discrete with a few support points. However, it is the order quantity prescribed from the model that is of practical relevance. A simple calculation shows that the optimal order quantity in Scarf's model with known first and second moment is also optimal for a censored student-t distribution with parameter 2. In this paper, we generalize this "heavy-tail optimality" property of the distributionally robust newsvendor to an ambiguity set where information on the first and the $alpha$th moment is known, for any real number $alpha>1$. We show that the optimal order quantity for the distributionally robust newsvendor problem is also optimal for a regularly varying distribution with roughly a power law tail with tail index $alpha$. We illustrate the usefulness of the model in the high service level regime with numerical experiments, by showing that when a standard distribution such as the exponential or lognormal distribution is contaminated with a heavy-tailed (regularly varying) distribution, the distributionally robust optimal order quantity outperforms the optimal order quantity of the original distribution, even with a small amount of contamination.

Full work available at URL: https://arxiv.org/abs/1806.05379

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zbMATH Keywords

convex programmingnewsvendor modelinventorystochastic modelsheavy-tailed distributionsdistributional robustnessmoment constraintsdistribution comparisons

Mathematics Subject Classification ID

Convex programming (90C25) Inventory, storage, reservoirs (90B05)

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Cited In (8)

• Distortion risk measure under parametric ambiguity
• Tight tail probability bounds for distribution-free decision making
• Controlling risk and demand ambiguity in newsvendor models
• Heterogeneity, asymmetry and applicability of behavioral newsvendor models
• MAD dispersion measure makes extremal queue analysis simple
• Advance selling under uncertain supply and demand: a robust newsvendor perspective
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• Building up cyber resilience by better grasping cyber risk via a new algorithm for modelling heavy-tailed data

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