Procurement strategies with quantity-oriented reference point and loss aversion

Abstract

This paper considers a single-product, single-period inventory management problem in which the retailer is loss averse with adaptive quantity-oriented reference points. The impact of the loss degree and the quantity-oriented reference point is investigated jointly on the optimal ordering quantity and the profit maximization of the retailer. It shows that there exists a unique optimal order quantity while maximizing the expected utility. The optimal solution can be readily determined via a numerical approach, and it has explicit forms for some special distribution functions. The loss-averse retailer’s order quantity is always less than loss-neutral decision maker’s when the reference dependency is under consideration. However, the optimal order quantity of the loss-averse system with quantity-oriented reference point is more than, equal to or less than that of the classical system. Furthermore, the structural properties and sensitivity analysis of the optimal solution are addressed. Several important managerial insights are presented by extensive numerical experiments, and finally, some conclusions and future work are given.