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

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.