The loss-averse newsvendor solutions via conditional value-at-risk measure

Tung Sun Chan, Xinsheng Xu, Xuping Wang, Junhu Ruan

Research output: Chapter in book / Conference proceedingConference article published in proceeding or bookAcademic researchpeer-review

Abstract

This paper studies the optimal order quantity in the loss-averse newsvendor model with shortage cost. The retailer's loss aversion is characterized by introducing a loss version coefficient and then a novel utility functions proposed for the retailer. The optimal order quantity for the retailer has been obtained to maximize the expected utility. In order to reduce the risk arising from the uncertainty in market demand, the CVaR measure has been introduced and the optimal order quantity for the retailer has been obatined to maximize the CVaR objective about utility. It is found that the optimal order quantity with CVaR objective decreased in the retail price under certain conditions. This significant finding has never been reported in the previous newsvendor literature. Under the optimal order quantity with CVaR objective, it is proved that the retailer's expected utility is decreasing in the confidence level. This confirms the fact that low risk means low return while high return comes with high risk. A numerical example is given to illustrate the results and some management insights are suggested for the loss-averse newsvendor model.
Original languageEnglish
Title of host publication7th Annual Conference on Industrial Engineering and Operations Management, IEOM 2017
PublisherIEOM Society
Pages246-247
Number of pages2
ISBN (Print)9780985549763
Publication statusPublished - 1 Jan 2017
Event7th Annual Conference on Industrial Engineering and Operations Management, IEOM 2017 - Hotel Sofitel Rabat Jardin des Roses, Rabat, Morocco
Duration: 11 Apr 201713 Apr 2017

Conference

Conference7th Annual Conference on Industrial Engineering and Operations Management, IEOM 2017
Country/TerritoryMorocco
CityRabat
Period11/04/1713/04/17

Keywords

  • CVaR measure
  • Expected utility
  • Newsvendor model

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research
  • Control and Systems Engineering
  • Industrial and Manufacturing Engineering

Cite this