Loss-averse newsvendor problem with supply risk

Lijun Ma, Weili Xue, Yingxue Zhao and Qinghua Zeng
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Lijun Ma: Shenzhen University, Shenzhen, China
Weili Xue: Southeast University, Nanjing, China
Yingxue Zhao: University of International Business and Economics, Beijing, China
Qinghua Zeng: Shenzhen University, Shenzhen, China

Journal of the Operational Research Society, 2016, vol. 67, issue 2, 214-228

Abstract: Modeling the manufacturer as a newsvendor, in this paper we study the ordering decisions of a loss-averse newsvendor with supply and demand uncertainties. Using the stylized newsvendor models, we analyse several key issues, including the effect of the newsvendor’s loss aversion, the effect of demand uncertainty, and the effect of supply uncertainty on the decision maker’s optimal decision under the procurement model, in which the decision maker only pays for the actual quantity received. Through our analysis, we find the following facts: the optimal order quantity decreases with respect to the degree of loss-aversion; the supply uncertainty induces the decision maker to order more than that in a deterministic environment; a stochastically larger demand always results in a larger order quantity and a larger expected utility; the optimal expected utility decreases in the demand volatility while the optimal order quantity may increase or decrease. Moreover, with numerical experiments, we demonstrate that the supply risk negatively affects the utility more than the demand risk does.

Date: 2016
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