Joint Inventory, Pricing, and Advertising Decisions with Surplus and Stockout Loss Aversions

Abstract

The newsvendor models considering decision-makers’ behavioral factors remain a fruitful research area in operation management field in past decade. In this paper, we further extend the current literatures to look into joint inventory, pricing, and advertising decisions considering loss aversion effects under the newsvendor setting. The purpose is to explore how the loss aversions affect the optimal policy of order quantity, price, and advertising effort level. We present an integrated utility model to measure both economic payoff and loss aversion utility of the newsvendor, where surplus loss aversion and stockout loss aversion are first separately defined and quantified. Then, we analyze the optimal solution conditions of the integrated model under exogenous and endogenous price cases, respectively. Under exogenous price case, we find that the uniquely optimal policy exists and is presented in the closed form. Under endogenous price case, the optimal policy is determined under mild conditions; we also provide the solutions when order quantity factor or advertising effort level is fixed in this case. In addition, the sensitivity analysis shows that the loss aversions affect the optimal decisions of order quantity, price, and advertising effort level in a systematic way.

Optimal Strategies for Manufacturers with the Reference Effect under Carbon Emissions-Sensitive Random Demand

“…When the manufacturer showed the same feeling of aversion for two kinds of losses, the two effects counteract each other. Cao et al [26] derive a similar result for the loss aversion caused by the newsvendor's reference effect in terms of the exogenous price.…”

“…For convenient calculation and clear results, we introduce the inventory factor = − ( − − ) into the model. It represents the risk-free inventory level [25,26,31]. So the profit function of the manufacturer can be rewritten as…”

“…We regard the theoretical maximum profit as the reference point for the manufacturer, i.e., = = ( − ) − ℎ( 0 − ) 2 [26]. Because the realized profit of the manufacturer is less than his expectation, the manufacturer may feel extra loss in addition to the actual economic loss, i.e., ≤ .…”

“…Cao et al [26] investigate the newsvendor model with the reference effect and derive joint inventory, pricing, and advertising decision. They show that the loss-averse solutions are different from the loss-neutral solutions since loss aversion behaviors of a newsvendor affect the order quantity, pricing, and advertising decisions; specifically, the order quantity increases with the stockout aversion parameter and decreases with the surplus aversion parameter.…”

Optimal Ordering and Pricing Policies for Seasonal Products: Impacts of Demand Uncertainty and Capital Constraint

“…Based on these basic models, integrated decisions on ordering and pricing are investigated under different settings Discrete Dynamics in Nature and Society 3 and perspectives, such as product return [2,28], supply uncertainty [29], service level constraint [30,31], multiple price markdowns [32], supply chain contracts [33,34], dual sourcing channel [35,36], and multiperiod planning [3,37,38]. Other creative works include the research on joint ordering and pricing decisions considering repeat-purchase based on the Bass model [39], retailer's ordering and pricing decisions of responding to the supplier's temporary price discounts [40], ordering and pricing model considering transshipment between two independent retailers [41], and retailer's joint ordering, pricing and advertising decisions [42].…”