On the Relevance of Incorporating Decision Dependence in Distributional Ambiguity

Abstract

Most existing studies on distributionally robust optimization (DRO) with a decision-dependent ambiguity set focus on the computational and theoretical challenges posed by this class of problems. In this paper, we adopt a combined modeling and computational perspective to understand the trade-offs between modeling fidelity, solution quality, and computational effort, particularly in comparison with DRO models using decision-independent ambiguity sets. Motivated by representative applications in joint pricing-stocking newsvendor problems with price-dependent demand and facility location problems with location-dependent demand, we consider a two-stage stochastic mixed-integer program with (non)convex continuous recourse. Assuming a finite sample space, we model the decision-dependent distributional ambiguity with a polyhedral ambiguity set and reformulate the problem as a nonconvex mixed-integer nonlinear program. To efficiently solve the reformulations, we propose decomposition-based cutting-plane algorithms. Our experiments on benchmark instances indicate that a decision-dependent ambiguity set substantially reduces the postdecision disappointment for the newsvendor and out-of-sample cost for the facility location problems, up to 65% and 7% on average, respectively; thereby mitigating the optimizer's curse relative to a decision-independent DRO. However, this improvement is achieved at the expense of increased computational effort, with the absolute runtime ratio falling between 2 and 25 for medium- to large-sized newsvendor instances and between 2 and 12 for facility location instances.