Joint pricing and stocking decisions for a newsvendor problem with loss aversion and reference point effect

Abstract

This study investigates the joint pricing and stocking decisions for a loss‐averse retailer with reference point effect under stochastic demand. By solving an expected utility maximization model developed based on the prospect theory, the optimal pricing and stocking decisions are derived and compared with those of the classical newsvendor. The results show that the optimal decisions significantly depend on the loss aversion coefficient, optimism level, and reference effect strength. Smaller loss aversion coefficient and lower optimism level lead to higher expected utilities. In particular, a loss‐averse retailer with a smaller loss aversion coefficient benefits from a higher reference effect strength and vice versa.