A Bayesian approach to determine the value of information in the newsboy problem

The potential benefits of demand forecasting in a newsboy problem are to decrease the risk of overstocking or shortage, but forecasting is usually not free. In this paper, a model to help the decision-maker in a newsboy problem to assess the value of information is presented. First, two cases on ava...

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Bibliographic Details
Published inInternational journal of production economics Vol. 112; no. 1; pp. 391 - 402
Main Author Lee, Chih-Ming
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.03.2008
Elsevier
Elsevier Sequoia S.A
SeriesInternational Journal of Production Economics
Subjects
Bayesian analysis
Decision making models
Demand analysis
Forecasting
Information
Newsboy problems
Studies
Value of information
Newsboy problems
Value of information
Forecasting
Bayesian analysis
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Summary:The potential benefits of demand forecasting in a newsboy problem are to decrease the risk of overstocking or shortage, but forecasting is usually not free. In this paper, a model to help the decision-maker in a newsboy problem to assess the value of information is presented. First, two cases on available demand information are considered to develop an upper bound of the cost that the decision-maker would spend on forecasting. Then, a Bayesian approach to forecasting is proposed and EVAI, the expected value of additional information, is computed to help the decision-maker in deciding whether to use the extra information. Finally, the relationship between the EVAI and model parameters is discussed.
ISSN:0925-5273
1873-7579
DOI:10.1016/j.ijpe.2007.04.005