Loss-averse newsvendor problem with general profit target
by Lijun Ma
International Journal of Information and Decision Sciences (IJIDS), Vol. 1, No. 2, 2008

Abstract: The newsvendor problems are widely studied in the literature and usually based on the assumption of expected profit maximising, that is risk-neutral assumption. Even for those who consider maximising risk-averse objective, very few are concerned with the loss-averse objective. In this article, we employ a loss-aversion utility function to model the newsvendor's decision-making behaviour which is more common in practice. We find that under very general assumption, the loss-averse newsvendor orders less than a risk-neutral newsvendor given the same initial inventory. We also find that the loss-averse newsvendor's optimal order-up-to level is equal to the risk-neutral newsvendor's optimal order-up-to level, when the reference target is large enough. We also indicate the importance of initial inventory to achieve the profit target.

Online publication date: Sat, 27-Dec-2008

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