IDEAS home Printed from https://ideas.repec.org/a/taf/tprsxx/v57y2019i14p4594-4620.html
   My bibliography  Save this article

Optimal option purchase decision of a loss-averse retailer under emergent replenishment

Author

Listed:
  • Xinsheng Xu
  • Felix T.S. Chan
  • Chi Kin Chan

Abstract

This paper studies the optimal option purchase of a loss-averse retailer under emergent replenishment. It is assumed that all or part of the excess demands in a stock-out situation can be replenished, and the loss-averse retailer's optimal option purchase quantity is investigated. It is found that the loss-averse retailer should not purchase options and only needs to replenish the inventory under certain conditions. When maximizing the expected utility without shortage cost, the loss-averse retailer's optimal option purchase quantity is decreasing in the loss aversion coefficient. To maximise the expected utility with shortage cost, a larger shortage cost implies a bigger option purchase quantity. If the shortage cost exists, there will be a loss on the expected profit and utility for the loss-averse retailer who selects an optimal option purchase quantity without shortage cost. Given the optimal option purchase quantity, it is proven that the loss-averse retailer's expected profit is decreasing in the loss aversion coefficient. Therefore the retailer should choose a proper loss aversion preference to balance between the two objectives of profit maximization and loss aversion preference. As a result of these findings, some management insights are recommended to the loss-averse retailer in selecting the option purchase quantity.

Suggested Citation

  • Xinsheng Xu & Felix T.S. Chan & Chi Kin Chan, 2019. "Optimal option purchase decision of a loss-averse retailer under emergent replenishment," International Journal of Production Research, Taylor & Francis Journals, vol. 57(14), pages 4594-4620, July.
  • Handle: RePEc:taf:tprsxx:v:57:y:2019:i:14:p:4594-4620
    DOI: 10.1080/00207543.2019.1579935
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/00207543.2019.1579935
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/00207543.2019.1579935?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xiaoqing Liu & Felix T. S. Chan & Xinsheng Xu, 2019. "Hedging Risks in the Loss-Averse Newsvendor Problem with Backlogging," Mathematics, MDPI, vol. 7(5), pages 1-23, May.
    2. Wei Liu & Han Zhao & Shiji Song & Wenxuan He & Xiaochen Li, 2021. "Coping with Loss Aversion and Risk Management in the Supply Chain Coordination," Sustainability, MDPI, vol. 13(8), pages 1-18, April.
    3. Haozhe Huang & Xiaowei Li & Shuai Liu, 2022. "Loss Aversion Order Strategy in Emergency Procurement during the COVID-19 Pandemic," Sustainability, MDPI, vol. 14(15), pages 1-10, July.
    4. Xu, Xinsheng & Ji, Ping & Sang, Shuming, 2023. "Supply option purchasing decisions via mismatch cost minimization," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 210(C), pages 260-280.
    5. Gongli Luo & Xiaoqing Liu & Felix T. S. Chan, 2023. "Optimal Ordering Decisions in Portfolio Procurement Considering Spot Price Fluctuation," Sustainability, MDPI, vol. 15(14), pages 1-13, July.
    6. Felix T. S. Chan & Xinsheng Xu, 2019. "The Loss-Averse Retailer’s Order Decisions Under Risk Management," Mathematics, MDPI, vol. 7(7), pages 1-16, July.
    7. Xu, Xinsheng & Ji, Ping & Chan, Felix T.S., 2022. "On maximizing a loss-averse buyer’s expected utility in a multi-sourcing problem," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 202(C), pages 388-404.
    8. Zhen Li & Jia Zhao & Qingfeng Meng, 2022. "Dual-channel recycling e-waste pricing decision under the impact of recyclers’ loss aversion and consumers’ bargaining power," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(10), pages 11697-11720, October.
    9. Xiaoqing Liu & Gongli Luo & Xinsheng Xu, 2022. "Optimal Purchasing Decisions with Supplier Default in Portfolio Procurement," Mathematics, MDPI, vol. 10(17), pages 1-10, September.
    10. Luyao Wang & Libin Chen & Zhiwei Yang & Minghao Li & Kewei Yang & Mengjun Li, 2022. "A Prospect-Theory-Based Operation Loop Decision-Making Method for Kill Web," Mathematics, MDPI, vol. 10(19), pages 1-28, September.
    11. Xing, Wei & Li, Qiankun & Zhao, Xuan & Li, Jialu, 2020. "Information sale and contract selection under downstream competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 136(C).
    12. Wei Liu & Shiji Song & Ying Qiao & Han Zhao & Huachang Wang, 2020. "The Loss-Averse Newsvendor Problem with Random Yield and Reference Dependence," Mathematics, MDPI, vol. 8(8), pages 1-15, July.
    13. Hao Zou & Jin Qin & Xiaofeng Long, 2022. "Coordination Decisions for a Low-Carbon Supply Chain Considering Risk Aversion under Carbon Quota Policy," IJERPH, MDPI, vol. 19(5), pages 1-24, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:tprsxx:v:57:y:2019:i:14:p:4594-4620. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/TPRS20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.