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Salient compromises in the newsvendor game

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  • Dertwinkel-Kalt, Markus
  • Köster, Mats

Abstract

The newsvendor problem denotes the puzzle that a retailer facing an uncertain demand for some product underreacts to profit margins, and hence adjusts the order quantity toward the expected demand. Due to its range of applications in operations management, this problem has drawn much interest in recent years. Various articles have tried to reconcile the newsvendor problem with loss aversion under ad hoc assumptions on the underlying reference point. We, instead, argue that the newsvendor problem is an application of the well-studied compromise effect. As the compromise effect is based on violations of the IIA axiom, we argue that models of context-dependent behavior, such as salience theory, better explain newsvendor-like behavior than loss aversion-based models. We conduct a novel experiment which allows us to clearly distinguish between the role of loss aversion and salience, and find strong support for the latter. Thereby, we also add to the agenda of comparing loss aversion-based models and salience theory.

Suggested Citation

  • Dertwinkel-Kalt, Markus & Köster, Mats, 2017. "Salient compromises in the newsvendor game," Journal of Economic Behavior & Organization, Elsevier, vol. 141(C), pages 301-315.
  • Handle: RePEc:eee:jeborg:v:141:y:2017:i:c:p:301-315
    DOI: 10.1016/j.jebo.2017.07.008
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    Cited by:

    1. Dertwinkel-Kalt, Markus & Wenzel, Tobias, 2019. "Focusing and framing of risky alternatives," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 289-304.
    2. Markus Dertwinkel-Kalt & Mats Köster, 2020. "Salience and Skewness Preferences [Risk-neutral Firms can Extract Unbounded Profits from Consumers with Prospect Theory Preferences]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2057-2107.
    3. Grove, Wayne A. & Jetter, Michael & Papps, Kerry L., 2018. "Career Lotto: Labor Supply in Winner-Take-All Markets," IZA Discussion Papers 12012, Institute of Labor Economics (IZA).
    4. Christian Köster & Heike Schenk-Mathes & Christopher Specht, 2019. "Explanatory power of behavioral models in the newsvendor problem: a simulation study," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 27(2), pages 311-324, June.
    5. Qinghui Xu & Xiangfeng Ji, 2020. "User Equilibrium Analysis Considering Travelers’ Context-Dependent Route Choice Behavior on the Risky Traffic Network," Sustainability, MDPI, vol. 12(17), pages 1-25, August.

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    More about this item

    Keywords

    Newsvendor problem; Loss aversion; Salience; Compromise effects;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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