Inventory control and pricing for regret-averse newsvendor

Abstract

The decision maker’s perception of regret affects a company’s inventory control and pricing decisions. In this paper, we investigate how regret aversion behaviors affect the inventory control and pricing decisions under a newsvendor setting. To capture the regret aversion behaviors of the newsvendor, we provide a regret aversion utility function. Based on the built regret aversion utility function and the classic inventory control and pricing model, we construct utility function by integrating the profit utility and the regret aversion utility, and then analyze the conditions of optimal solution on the inventory and pricing policy under additive and multiplicative demand in details. Further, by the analysis of properties and numerical study, we show that the optimal policy for regret-averse newsvendor deviates from the one for regret-neutral newsvendor and changes with the regret aversion parameters to varying degree. We also show the impact tendency of newsvendor’s regret aversion behaviors on the optimal inventory and pricing policy under the additive and multiplicative demand.