Quality information acquisition and ordering decisions with risk aversion

Abstract

This paper investigates a retailer’s quality information acquisition and ordering decisions in the presence of risk aversion. We formulate a newsvendor model and derive the retailer’s optimal order quantity under two scenarios, one with and one without quality information acquisition, by minimising expected risk based on the CVaR criterion. Then, we compare the optimal ordering quantities and the profits under the two scenarios and discuss the quality information acquisition decision. Our results show that it will be more effective for the retailer to acquire quality information if the retailer exhibits greater risk aversion or the information is more precise; the retailer would order less when she is more risk-averse and the impact of risk aversion would be reduced by quality information acquisition. Interestingly, the retailer’s profits may decrease even when the quality information is more precise.