Managing regretful newsvendors and supply chain performance through target-setting

The equilibrium order quantity of the regretful newsvendors generally presents the pull-to-center effect, leading to lower profits. This study finds that a target-setting approach which serves as a pervasive mechanism adopted by the manager can effectively counteract this bias. Rich literature finds that the regret bias makes newsvendors worse in practice; however, there is a lack of efficient and costless approaches to solving this issue. This study combines the target-setting with the regret model by considering reference dependence and loss aversion to characterize newsvendors’ utility under target-setting. The two effects are proven to interact with each other and jointly decide whether it turns out to be overordering or underordering. Interestingly, a high profit-margin target or a strong loss aversion may result in an effect opposite to the pull-to-center effect. Excluding selling high-margin products with a stronger aversion to leftover regret, the manager can motivate regretful newsvendors to select the profit-maximizing order quantity through target-setting. We extend our study to the selling-to-newsvendor setting and further verify that newsvendors’ regret bias may benefit the supply chain and can be exploited by the supplier. Significantly, target-setting may even help achieve supply chain coordination under a simple wholesale price. This study provides instructions for managers to avoid firms’ profit loss and achieve the maximum channel profit.