Two-Stage Newsvendor Problem with Loss Aversion and Probability Weighting Effects

Abstract

This paper studies a two-stage newsvendor problem with two suppliers, where the retailer's loss aversion and probability weighting effects are considered. We solve the model by backward induction and derive the optimal order quantities in the first and second stages. We provide the prerequisites of the retailer's selection between the two suppliers. We find that the optimal order quantity in the first stage decreases with the loss aversion coefficient and the capacity of the second-stage, and increases with the cost of the second-stage. As the coefficient of the probability weighting function increases, the optimal first-order quantity may increase or decrease.