Reference-Dependence in Multi-Location Newsvendor Models: A Structural Analysis

Ho, Teck-Hua; Lim, Noah; Cui, Tony Haitao

doi:10.2139/ssrn.1419725

Cited by 18 publications

(21 citation statements)

References 29 publications

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“…In order to capture asymmetric effects similar to those found in Ho et al. () and Davis and Katok (), we distinguish Under stock inventory error,

{false[D_{t - 1} - q_{t - 1} false]}^{+}

, from Over stock inventory error,

{false[q_{t - 1} - D_{t - 1} false]}^{+}

. Finally, and based on the observations from the previous section, we include Period t to capture any systematic learning, and we use periods t = 6−30 of our data.…”

Section: Resultsmentioning

confidence: 99%

Willingness to Pay for Shifting Inventory Risk: The Role of Contractual Form

Kremer

Wassenhove

2014

Production and Operations Management

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I n order to reduce their inventory risk, firms can attempt to contract with their suppliers for shorter supply lead-times, with their buyers for longer demand lead-times, or both. We designed a controlled laboratory experiment to study contracts that shift a focal firm's inventory risk to its supply chain partners and address two questions. First, is it more effective if the cost of shifting inventory risk is framed as a fixed fee or in per-unit cost terms? We find that, generally, our participants are willing to pay more to avoid supply-demand mismatches than the expected costs from such mismatches. This tendency to overpay is mitigated under fixed fee schemes. Second, does it matter whether the option to reduce inventory risk is the outcome of either increased responsiveness from the upstream supplier or advanced demand information from the downstream buyer? Our results suggest that this difference, when only a matter of framing, has no significant effect on willingness-to-pay.Key words: newsvendor decisions; value of demand information; fixed fee and per-unit contracts History:

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“…In order to capture asymmetric effects similar to those found in Ho et al. () and Davis and Katok (), we distinguish Under stock inventory error,

{false[D_{t - 1} - q_{t - 1} false]}^{+}

, from Over stock inventory error,

{false[q_{t - 1} - D_{t - 1} false]}^{+}

. Finally, and based on the observations from the previous section, we include Period t to capture any systematic learning, and we use periods t = 6−30 of our data.…”

Section: Resultsmentioning

confidence: 99%

Willingness to Pay for Shifting Inventory Risk: The Role of Contractual Form

Kremer

Wassenhove

2014

Production and Operations Management

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“…Recently, in a push newsvendor setting, Ho et al. () show that a newsvendor's utility function, under reference dependence, is comprised of the regular expected‐profit function, plus two disutility terms: one term associated with the psychological cost of having leftover units or overages, and a second term associated with the psychological cost of stockouts or underages. Ho et al.…”

Section: Behavioral Modelsmentioning

confidence: 99%

“…Specifically, page 1894 of Ho et al. , equation (1)), displays the expected‐utility function of the retailer setting a quantity, in a push setting as

\begin{matrix} 0.5ex \\ right u false(q false) & left = π_{R} (q) - \int_{0}^{q} δ_{o} (q - x) d F (x) \\ left - \int_{q}^{\infty} δ_{u} (x - q) d F (x) \end{matrix},

where π R ( q ) is the retailer's expected profit function, δ o ≥ 0 represents the psychological per‐unit cost of an overage, and δ u ≥ 0 is the psychological per‐ unit cost of an underage. Again, this is for a party setting quantities in a push setting, which differs from the setting explored in this study.…”

Section: Behavioral Modelsmentioning

confidence: 99%

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An Experimental Investigation of Pull Contracts in Supply Chains

Davis

2015

Production and Operations Management

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In this study, I investigate supply chain contracts in a setting where a supplier uses its inventory to directly satisfy a retailer's demand. These “pull” contracts have increased in popularity in practice but have not been studied experimentally. In a controlled laboratory setting, I evaluate a wholesale price contract and two coordinating contracts. The data suggest that the benefit of the two coordinating contracts over the wholesale price contract is less than the standard theory predicts, and that retailers, in the two coordinating contracts, exhibit a systematic bias of setting the coordinating parameter too low, and the wholesale price too high, relative to the normative benchmarks. In an effort to explain this deviation, I explore three behavioral models and find that loss aversion and reference dependence fit the data well. I empirically test this result in a follow‐up experiment, which directly controls for loss aversion and reference dependence, and observe that retailers make significantly better decisions. Lastly, I administer a number of experiments which reduce the complexity of the problem, curtail the amount of risk, and increase the level of decision support, and find that none improve decisions relative to the treatment that controls for loss aversion and reference dependence.

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“…Most existing research, however, has not addressed behavioral issues beyond a simple supply chain dyad (for an exception, see Ho et al. ). This research investigates social preferences in a one‐supplier and two‐retailer supply chain.…”

Section: Introductionmentioning

confidence: 99%