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Loss-averse newsvendor problem with supply risk

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Journal of the Operational Research Society

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.

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Acknowledgements

The authors thank the editor and the referees for their constructive comments. This research is partially supported by the National Natural Science Foundation of China (NSFC) (Nos. 71001073, 71101028, 71301023, 71371052, 71390333, 71471118), the Humanities and Social Sciences Foundation of Ministry of Education of China (Nos. 13YJC630197, 14YJC630096), the Program for New Century Excellent Talents in University (NCET-13-0733), the Distinguished University Young Scholar Program of Guangdong Province (No. Yq2013140), the Basic Research Foundation (Natural Science) of Jiangsu Province (No. BK20130582), the Beijing Natural Science Foundation (9143020), the Fundamental Research Funds for the Central Universities in UIBE (14JQ02), and the Program for Innovative Research Team in UIBE

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Authors and Affiliations

  1. Shenzhen University, Shenzhen, China

    Lijun Ma & Qinghua Zeng

  2. Southeast University, Nanjing, China

    Weili Xue

  3. University of International Business and Economics, Beijing, China

    Yingxue Zhao

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  1. Lijun Ma
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  2. Weili Xue
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  3. Yingxue Zhao
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  4. Qinghua Zeng
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Correspondence to Weili Xue.

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Ma, L., Xue, W., Zhao, Y. et al. Loss-averse newsvendor problem with supply risk. J Oper Res Soc 67, 214–228 (2016). https://doi.org/10.1057/jors.2015.22

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