The Newsvendor Problem Under Multiplicative Background Risk

Abstract

This note studies the single-period newsvendor problem when the newsvendor faces a multiplicative neutral independent background risk in an expected utility framework. It is shown that multiplicative risk vulnerability is a sufficient condition to guarantee a decrease in the optimal order. A weaker sufficient condition which has more interpretability is also provided and discussed. This result sheds light on situations where exchange, tax or inflation rates risks, which apply multiplicatively to the final wealth, are at work.

Keywords: newsvendor problem, multiplicative background risk, multiplicative risk vulnerability, derived utility function, expected utility

JEL Classification: D80, G22