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The loss-averse newsvendor problem

  • Wang, Charles X.
  • Webster, Scott

Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. This paper uses loss aversion to model manager's decision-making behavior in the single-period newsvendor problem. We find that if shortage cost is not negligible, then a loss-averse newsvendor may order more than a risk-neutral newsvendor. We also find that the loss-averse newsvendor's optimal order quantity may increase in wholesale price and decrease in retail price, which can never occur in the risk-neutral newsvendor model.

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Article provided by Elsevier in its journal Omega.

Volume (Year): 37 (2009)
Issue (Month): 1 (February)
Pages: 93-105

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Handle: RePEc:eee:jomega:v:37:y:2009:i:1:p:93-105
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  17. Scott Carr & William Lovejoy, 2000. "The Inverse Newsvendor Problem: Choosing an Optimal Demand Portfolio for Capacitated Resources," Management Science, INFORMS, vol. 46(7), pages 912-927, July.
  18. Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," NBER Working Papers 8190, National Bureau of Economic Research, Inc.
  19. Louis Eeckhoudt & Christian Gollier & Harris Schlesinger, 1995. "The Risk-Averse (and Prudent) Newsboy," Management Science, INFORMS, vol. 41(5), pages 786-794, May.
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