Reference-dependent preferences in the on-demand service newsvendor with self-scheduling capacity

Abstract

Prospect theory can systematically explain the decision biases caused by newsvendors' reference behavior in uncertain demand. Unlike the traditional newsvendor problems, the newsvendor in the on-demand services can manage the capacity depending on the price because of the self-scheduling participants. To bridge this gap, this work investigates the adequate capacity pool of eligible agents in an on-demand service newsvendor whose objective is to choose price to maximize the expected utility in uncertain demand settings. We consider two scenarios: With reference-dependent preferences and without reference dependence, and use the reference point of prospect theory to explain the on-demand service newsvendor's behavior. We show that the scenario with reference-dependent preferences affects the capacity pool of newsvendor and the eligible participant's revenue, where the subsidy and commission ratios play important roles. When the subsidy ratio is lower and commission ratio is higher, the eligible participants are better off in the scenario without reference-dependent preference. If the newsvendor needs to change the subsidy strategy after the price is determined, a lower bound on the subsidy ratio can be set to ensure the operations. Surprisingly, we find that the newsvendor considering reference payoff into the decision objective is worse off in profits because the pervasive “pull-to-center”-like phenomena in the price. Then, we examine the robustness of our results by considering a cap on the number of participants, the multiplier-based pricing in the peak periods, an alternative reference point, and a fixed price. The finding shows that our key result continues to hold.