Title: Loss-averse newsvendor problem with general profit target

Authors: Lijun Ma

Addresses: Department of Management Science, Shenzhen University, Shenzhen, PR China; Department of Systems Engineering and Engineering Mangement, The Chinese University of Hong Kong, Shatin, NT, Hong Kong, China

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.

Keywords: loss-averse newsvendor; newsvendor problems; risk-neutral newsvendor; expected profit; loss aversion utility function; decision making.

DOI: 10.1504/IJIDS.2008.022292

International Journal of Information and Decision Sciences, 2008 Vol.1 No.2, pp.145 - 163

Published online: 27 Dec 2008 *

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