A loss-averse ordering strategy with a piecewise-formed reference point

Chengzhi Fang (), Yongjiang Guo () and Zhaofeng He ()
Additional contact information
Chengzhi Fang: Beijing University of Posts and Telecommunications
Yongjiang Guo: Beijing University of Posts and Telecommunications
Zhaofeng He: Beijing University of Posts and Telecommunications

Annals of Operations Research, 2025, vol. 351, issue 3, No 2, 1767-1802

Abstract: Abstract We study a loss-averse (LA) retailer with a quantity-oriented reference point (RP) in a piecewise form in a random market. The proposed RP is characterized by a two-fold convex combination of three elements (profits in three environments) at low reference levels, and a standard convex combination of two elements (profits in two environments) at high reference levels. We aim to use prospect theory with the above piecewise-formed RP to characterize the LA retailer’s optimal procurement strategy in maximizing her expected profit, and describe the effect on the procurement strategy from some parameters. We prove that there exists a procurement strategy inducing the LA retailer to make her optimal ordering decision given a random market with a general distribution. We analyze the respective effect of LA degree and reference level on retailer’s optimal procurement strategy, and obtain some intuitive insights, such as, a LA retailer always orders less than a loss-neutral one; increasing LA degree leads to more cautious ordering behavior; a lower RP level leads retailer to over-order, and a higher RP leads to under-order. Moreover, we find that the joint effect from LA degree and RP level on the optimal order quantity is mutually reinforcing. This joint effect also presents results consistent with people’s cognition, that is, the optimal order quantity of a LA retailer with RP is more likely to be lower than a classical retailer, compared to a risk-neutral retailer with RP. We finally provide the sensitivity analysis of parameters on the optimal order strategy.

Keywords: Optimal ordering; Strategic behavior; Loss aversion; Reference-dependent preference; Piecewise-formed reference point (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10479-025-06679-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:351:y:2025:i:3:d:10.1007_s10479-025-06679-5

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-025-06679-5

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().