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

Abstract

This study investigates the joint pricing and stocking decisions for a loss‐averse retailer with reference point effect under stochastic demand. By solving an expected utility maximization model developed based on the prospect theory, the optimal pricing and stocking decisions are derived and compared with those of the classical newsvendor. The results show that the optimal decisions significantly depend on the loss aversion coefficient, optimism level, and reference effect strength. Smaller loss aversion coefficient and lower optimism level lead to higher expected utilities. In particular, a loss‐averse retailer with a smaller loss aversion coefficient benefits from a higher reference effect strength and vice versa.

Analyzing multiple pricing decisions for substitutes under stochastic demand: An experiment

“…This is a “loss aversion with reference points” type of behavior, which is a corollary of the prospect theory, where the decision makers perceive gains if the actual situation exceeds the reference point and perceive losses if the actual situation is below the reference point, leading them to sell at lower‐than‐optimal prices rather than not selling at all. This observation is not unusual in newsvendor settings; Long and Nasiry (2015), Mandal et al (2018) and Qiu et al (2021) report similar situations and show that the quantity decisions of decision makers in a newsvendor problem environment depend not only on loss aversion but also on reference point effects. Wu et al (2018) consider a situation where the newsvendor uses a target profit level as the anchor, and they prove that the anchoring behavior tends to decrease the order quantity (which is equivalent to selling at lower‐than‐optimal prices in our setting).…”

Dual-Channel Supply Chain Coordination with Loss-Averse Consumers

“…Wang [18] further developed a newsvendor model to study a competitive market with multiple loss-averse retailers. Liu et al [19] and Qiu et al [20] studied a loss-averse newsvendor problem with reference dependence, while Zhou et al [21] compared the impact of static loss-averse behaviors and dynamic loss-averse behaviors of retailers with demand uncertainty on the decisions and utilities of the supply chain. In this article, we consider both reference dependency and loss aversion of consumers.…”

Supply chain contracting with competing regretful retailers

“…Several researchers have built on the work of Long and Nasiry (2015) and proposed novel models of reference dependencies to explain newsvendor behavior. For example, Shen et al (2017) extended the results of Long and Nasiry (2015) to general demand distributions and decision‐independent reference point and Qiu et al (2021) build on Long and Nasiry (2015) to study the joint pricing and inventory decisions. Vipin and Amit (2019) considered a stochastic reference point to account for nonlinear ordering behavior.…”

“…Since the seminal work of Schweitzer and Cachon (2000), the behavior of newsvendors has attracted significant attention within both operations management (e.g., Bolton & Katok, 2008;Ho et al, 2010;Su, 2008) and microeconomics (e.g., Butters, 2019;Dertwinkel-Kalt & Köster, 2017;Herweg, 2013;Ockenfels & Selten, 2014Qiu et al, 2021).…”

“…Lab experiments with different populations (e.g., students, managers, and online participant pools) have consistently replicated both deviation from optimal ordering and the PTC effect in varying conditions, such as different demand distributions and critical fractiles (e.g., Bolton & Katok, 2008; Bolton et al, 2012; Lee et al, 2018; Ockenfels & Selten, 2014; Özer et al, 2014). Since the seminal work of Schweitzer and Cachon (2000), the behavior of newsvendors has attracted significant attention within both operations management (e.g., Bolton & Katok, 2008; Ho et al, 2010; Su, 2008) and microeconomics (e.g., Butters, 2019; Dertwinkel‐Kalt & Köster, 2017; Herweg, 2013; Ockenfels & Selten, 2014, 2015; Qiu et al, 2021).…”