A multiperiod newsvendor problem with partially observed demand

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)322-344
Journal / PublicationMathematics of Operations Research
Volume32
Issue number2
Publication statusPublished - May 2007
Externally publishedYes

Abstract

We consider a newsvendor problem with partially observed Markovian demand. Demand is observed if it is less than the inventory. Otherwise, only the event that it is larger than or equal to the inventory is observed. These observations are used to update the demand distribution from one period to the next. The state of the resulting dynamic programming equation is the current demand distribution, which is generally infinite dimensional. We use unnormalized probabilities to convert the nonlinear state transition equation to a linear one. This helps in proving the existence of an optimal feedback ordering policy. So as to learn more about the demand, the optimal order is set to exceed the myopic optimal order. The optimal cost decreases as the demand distribution decreases in the hazard rate order. In a special case with finitely many demand values, we characterize a near-optimal solution by establishing that the value function is piecewise linear. © 2007 INFORMS.

Research Area(s)

  • Markovian demand, Newsvendor problem, Unobserved unmet demand

Citation Format(s)

A multiperiod newsvendor problem with partially observed demand. / Bensoussan, Alain; Çakanyildirim, Metin; Sethi, Suresh P.

In: Mathematics of Operations Research, Vol. 32, No. 2, 05.2007, p. 322-344.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal