The loss-averse newsvendor problem

Charles X. Wang; Scott Webster

doi:10.1016/j.omega.2006.08.003

The loss-averse newsvendor problem

Charles X. Wang, Scott Webster

Research output: Contribution to journal › Article › peer-review

291 Scopus citations

Abstract

Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. This paper uses loss aversion to model manager's decision-making behavior in the single-period newsvendor problem. We find that if shortage cost is not negligible, then a loss-averse newsvendor may order more than a risk-neutral newsvendor. We also find that the loss-averse newsvendor's optimal order quantity may increase in wholesale price and decrease in retail price, which can never occur in the risk-neutral newsvendor model.

Original language	English (US)
Pages (from-to)	93-105
Number of pages	13
Journal	Omega
Volume	37
Issue number	1
DOIs	https://doi.org/10.1016/j.omega.2006.08.003
State	Published - Feb 2009
Externally published	Yes

Keywords

Inventory
Loss aversion
Newsvendor model

ASJC Scopus subject areas

Strategy and Management
Management Science and Operations Research
Information Systems and Management

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10.1016/j.omega.2006.08.003

Cite this

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abstract = "Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. This paper uses loss aversion to model manager's decision-making behavior in the single-period newsvendor problem. We find that if shortage cost is not negligible, then a loss-averse newsvendor may order more than a risk-neutral newsvendor. We also find that the loss-averse newsvendor's optimal order quantity may increase in wholesale price and decrease in retail price, which can never occur in the risk-neutral newsvendor model.",

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AB - Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. This paper uses loss aversion to model manager's decision-making behavior in the single-period newsvendor problem. We find that if shortage cost is not negligible, then a loss-averse newsvendor may order more than a risk-neutral newsvendor. We also find that the loss-averse newsvendor's optimal order quantity may increase in wholesale price and decrease in retail price, which can never occur in the risk-neutral newsvendor model.

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KW - Loss aversion

KW - Newsvendor model

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The loss-averse newsvendor problem

Abstract

Keywords

ASJC Scopus subject areas

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