A newsvendor problem with boundedly rational strategic customers

Yanan Song and Xiaobo Zhao

International Journal of Production Research, 2017, vol. 55, issue 1, 228-243

Abstract: This work considers a newsvendor system with strategic customers who are boundedly rational in terms of buying during the selling season or waiting for a discount in the savage market. The newsvendor’s decisions are to determine the selling price and order quantity. An optimisation problem is formulated with the incorporation of a game for interaction between strategic customers. We use the quantal choice framework to characterise the behaviour of strategic customers. It is shown that when the bounded rationality parameter is large, the quantal response equilibrium is unique; otherwise, multiple equilibria may exist. For the unique equilibrium case, it is not difficult to determine the optimal decisions for the newsvendor. For the multiple equilibria case, we give theoretical analyses and numerical calculations to provide implications to the newsvendor. Additionally, based on the special case (with perfectly rational strategic customers), some important results are also observed.

Date: 2017
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DOI: 10.1080/00207543.2016.1201607

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