Abstract
This paper studies a loss-averse newsvendor problem with reference dependence, where both demand and yield rate are stochastic. We obtain the loss-averse newsvendor’s optimal ordering policy and analyze the effects of loss aversion, reference dependence, random demand and yield on it. It is shown that the loss-averse newsvendor’s optimal order quantity and expected utility decreases in loss aversion level and reference point. Then, that this order quantity may be larger than the risk-neutral one’s if the reference point is less than a negative threshold. In addition, although the effect of random yield leads to an increase in the order quantity, the loss-averse newsvendor may order more than, equal to or less than the classical one, which significantly depends on loss aversion level and reference point. Numerical experiments were conducted to demonstrate our theoretical results.
Highlights
The newsvendor problem is a fundamental decision-making model in operations management and has attracted much scholarly attention over the decades
To address the above problems, we studied a loss-averse newsvendor problem with reference dependence and stochastically proportional yield, a typical supply risk under which the yield is the product of random yield rate and order quantity
We review the literature on the newsvendor problem from the following three aspects: loss aversion, reference dependence and supply uncertainty
Summary
The newsvendor problem is a fundamental decision-making model in operations management and has attracted much scholarly attention over the decades. To address the above problems, we studied a loss-averse newsvendor problem with reference dependence and stochastically proportional yield, a typical supply risk under which the yield is the product of random yield rate and order quantity This approach of modeling supply uncertainty is widely used in the literature (e.g., [10,13,14]), and can apply in a case in which batch size is relatively large or its variation is small, etc. The effect of random yield drives the order quantity up, the loss-averse newsvendor may order more than, equal to or less than the classical one, which heavily depends on loss aversion level and reference point These results demonstrate the significance of considering reference dependence.
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