Newsvendor Selling to Loss-Averse Consumers with Stochastic Reference Points

Opher Baron (), Ming Hu (), Sami Najafi-Asadolahi () and Qu Qian ()
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Opher Baron: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Ming Hu: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Sami Najafi-Asadolahi: Leavey School of Business, Santa Clara University, Santa Clara, California 95053
Qu Qian: School of Business, SIM University, Singapore 599491, Republic of Singapore; and School of International Business Administration, Shanghai University of Finance and Economics, Shanghai 200433, China

Manufacturing & Service Operations Management, 2015, vol. 17, issue 4, 456-469

Abstract: We study a newsvendor who sells a perishable asset over repeated periods to consumers with a given consumption valuation for the product. The market size in each period is random, following a stationary distribution. Consumers are loss averse with stochastic reference points that represent their beliefs about possible price and product availability . Given the distribution of reference points, they choose purchase plans to maximize their expected total utility, including gain-loss utility, before visiting the store, and follow the plans in the store. In anticipation of consumers' purchase plans, in each period, before demand uncertainty resolves, the firm chooses an initial order quantity. After the uncertainty resolves, the firm chooses a contingent price depending on the demand realization, with the option of clearing inventory by charging a sale price, and otherwise, posting a full price. Over repeated periods, the interaction of the firm’s operational decisions about ordering and contingent pricing and the consumers' purchase actions results in a distribution of reference points, and, in equilibrium, this distribution is consistent with consumers' beliefs. Under this framework of endogenized reference points, we fully characterize the firm’s optimal inventory and contingent pricing policies. We identify conditions under which the firm’s expected price and profit are increasing in the consumer loss aversion level. We also show that the firm can prefer demand variability over no-demand uncertainty. We obtain a set of insights into how consumers' loss aversion affects the firm’s optimal operational policies that are in stark contrast to those obtained in classic newsvendor models. As examples, the optimal full price increases in the initial order quantity; and the optimal full price decreases, while the optimal sales frequency increases, in the procurement cost.

Keywords: newsvendor; behavioral operations; loss aversion; contingent pricing; marketing promotion; stochastic reference points (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:17:y:2015:i:4:p:456-469

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