Pricing and ordering by a loss averse newsvendor with reference dependence

Abstract

This study examines the joint optimization of pricing and ordering decisions for a loss-averse newsvendor with reference dependence. We explore the effects of reference dependence and loss aversion from various aspects. We find that demand type, reference point type and cost setting heavily affect the optimal decisions. For multiplicative demand, reference dependence leads to ordering less. Whether to further raise the price depends on the cost setting. For additive demand, selling fewer (cheaper) is the best in the fixed-amount (fixed-ratio) cost setting. Compared with a deterministic reference point, stochastic reference point has a lower price and a higher inventory level.

Joint pricing and stocking decisions for a newsvendor problem with loss aversion and reference point effect

“…They only investigated the impact of the reference point effect on the ordering decision in a nonpricing setting. This study extends the works of Bai et al (2019) and Wei et al (2019) in the following aspects: (1) The reference point profit is defined as a convex combination of the maximal possible profit and the maximal potential loss. In particular, the reference effect strength is also considered to be a decision attribute of the loss‐averse managers.…”

“…Table 1 summarizes the contributions of the relevant works and presents the differences between this study and the other works in the reference‐dependence behavior literature. In Table 1, Bai et al (2019) and Wei et al (2019) are the most relevant works to this study. Bai et al (2019) also considered the pricing and ordering decisions and introduced target gross profit defined by the product of the price and the order quantity as the reference point.…”

“…In Table 1, Bai et al (2019) and Wei et al (2019) are the most relevant works to this study. Bai et al (2019) also considered the pricing and ordering decisions and introduced target gross profit defined by the product of the price and the order quantity as the reference point. However, they did not consider the reference effect strength which typically influences the decisions.…”

“…Such a demand function is widely used in the field of operations management (Bai et al, 2019; Rubio‐Herrero & Baykal‐Gürsoy, 2018; Ye & Sun, 2016). In this demand function, y ( p ) = a − bp represents the deterministic part of the demand which is a decreasing function of the retail price p , the parameters a and b , with a , b > 0, denote the potential market size and the consumer's price sensitivity coefficient, respectively, and ε is the stochastic part of the demand.…”

Price Differentiation and Inventory Decisions in a Socially Responsible Dual-Channel Supply Chain with Partial Information Stochastic Demand and Cannibalization

“…The differentiation price υ is used as the market segmentation tool that divides a monolithic market share into two market segments subject to linear price sensitivity of β. Linear price-dependent deterministic demand is among the widely used for modeling pricing decisions in many applications, such as newsvendor pricing [101,103], pricing in RM [21,104,105], and pricing in SC [106][107][108]. Earlier studies have noted linear price-dependent demands are most suited because their ability to capture many realistic market scenarios while yet being simplistic [21,101,106,109].…”