Assessing the quality of convex approximations for two-stage totally unimodular integer recourse models

We consider two types of convex approximations of two-stage totally unimodular integer recourse models. Although worst-case error bounds are available for these approximations, their actual performance has not yet been investigated, mainly because this requires solving the original recourse model. In this paper we assess the quality of the approximating solutions using Monte Carlo sampling, or more specifically, using the so-called multiple replications procedure. Based on numerical experiments for an integer newsvendor problem, a fleet allocation and routing problem, and a stochastic activity network investment problem, we conclude that the error bounds are reasonably sharp if the variability of the random parameters in the model is either small or large; otherwise, the actual error of using the convex approximations is much smaller than the error bounds suggest. Moreover, we conclude that the solutions obtained using the convex approximations are good only if the variability of the random parameters is medium to large. In case this variability is small, however, typically sampling methods perform best, even with modest sample sizes. In this sense, the convex approximations and sampling methods can be considered as complementary solution methods. Moreover, as required for our applications, we extend our approach to derive new error bounds dealing with deterministic second-stage side constraints and relatively complete recourse, and perfect dependencies in the right-hand side vector

Simulation-Based Confidence Bounds for Two-Stage Stochastic Programs ∗

This paper provides a rigorous asymptotic analysis and justification of upper and lower confidence bounds proposed by Dantzig and Infanger (1995) for an iterative sampling-based decomposition algorithm, introduced by Dantzig and Glynn (1990) and Infanger (1992), for solving two-stage stochastic programs. Extensions of the theory to cover use of variance reduction, different iterative sampling sizes, and the dropping of cuts are also presented. An extensive empirical investigation of the performance of these bounds establishes that the bounds perform reasonably on realistic problems