Newsvendor under Ambiguity and Misspecification

Understand

Problem definition: We consider a newsvendor problem with unknown demand distribution, where we distinguish ambiguity under which the newsvendor does not differentiate demand distributions of common characteristics and misspecification under which such characteristics might be misspecified.

• Methodology/results: The newsvendor hedges against ambiguity and misspecification by maximizing the worst-case expected profit regularized by a distribution's distance to an ambiguity set.
• Focusing on the popular mean-variance ambiguity set and optimal-transport cost for the misspecification, we show that the decision criterion of misspecification aversion possesses insightful interpretations as distributional transforms.
• We derive the closed-form optimal order quantity that generalizes the solution of the Scarf model under only ambiguity aversion.