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The loss-averse newsvendor model with backordering

Author

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  • Xu, Xinsheng
  • Wang, Hongwei
  • Dang, Chuangyin
  • Ji, Ping

Abstract

In this paper, we study the optimal order quantity in the loss-averse newsvendor model with backordering. We first obtain the optimal order quantity to maximize the expected utility. To hedge against the risk arising from the uncertainty of market demand, we introduce the Conditional Value-at-Risk (CVaR) measure and derive the optimal order quantity to maximize the CVaR objective about utility. It is found that the optimal order quantity with the CVaR objective is decreasing in the confidence level, and thus is smaller than the optimal order quantity to maximize the expected utility. It is proved that under the optimal order quantity with the CVaR objective, the loss-averse newsvendor's expected utility is decreasing in the confidence level. It further confirms that high risk implies high return and low risk comes with low return.

Suggested Citation

  • Xu, Xinsheng & Wang, Hongwei & Dang, Chuangyin & Ji, Ping, 2017. "The loss-averse newsvendor model with backordering," International Journal of Production Economics, Elsevier, vol. 188(C), pages 1-10.
    • Handle: RePEc:eee:proeco:v:188:y:2017:i:c:p:1-10
    DOI: 10.1016/j.ijpe.2017.03.005
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    Cited by:

    1. Xiaoqing Liu & Felix T. S. Chan & Xinsheng Xu, 2019. "Hedging Risks in the Loss-Averse Newsvendor Problem with Backlogging," Mathematics, MDPI, vol. 7(5), pages 1-23, May.
    2. Wei Liu & Han Zhao & Shiji Song & Wenxuan He & Xiaochen Li, 2021. "Coping with Loss Aversion and Risk Management in the Supply Chain Coordination," Sustainability, MDPI, vol. 13(8), pages 1-18, April.
    3. Haozhe Huang & Xiaowei Li & Shuai Liu, 2022. "Loss Aversion Order Strategy in Emergency Procurement during the COVID-19 Pandemic," Sustainability, MDPI, vol. 14(15), pages 1-10, July.
    4. Felix T. S. Chan & Xinsheng Xu, 2019. "The Loss-Averse Retailer’s Order Decisions Under Risk Management," Mathematics, MDPI, vol. 7(7), pages 1-16, July.
    5. Xu, Xinsheng & Ji, Ping & Chan, Felix T.S., 2022. "On maximizing a loss-averse buyer’s expected utility in a multi-sourcing problem," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 202(C), pages 388-404.
    6. Yan, Nina & Xu, Xun & Huang, Wenyi, 2021. "Supplier's capacity investment strategy with factoring finance," International Journal of Production Economics, Elsevier, vol. 238(C).
    7. Wang, Daao & Dimitrov, Stanko & Jian, Lirong, 2020. "Optimal inventory decisions for a risk-averse retailer when offering layaway," European Journal of Operational Research, Elsevier, vol. 284(1), pages 108-120.
    8. Cao, Erbao & Du, Lingxia & Ruan, Junhu, 2019. "Financing preferences and performance for an emission-dependent supply chain: Supplier vs. bank," International Journal of Production Economics, Elsevier, vol. 208(C), pages 383-399.
    9. Chen, Mingyang & Zhao, Daozhi & Gong, Yeming & Hong, Zhaofu, 2021. "Reference-dependent preferences in the on-demand service newsvendor with self-scheduling capacity," International Journal of Production Economics, Elsevier, vol. 234(C).
    10. Irfanullah Khan & Biswajit Sarkar, 2021. "Transfer of Risk in Supply Chain Management with Joint Pricing and Inventory Decision Considering Shortages," Mathematics, MDPI, vol. 9(6), pages 1-20, March.
    11. Wei Liu & Shiji Song & Ying Qiao & Han Zhao & Huachang Wang, 2020. "The Loss-Averse Newsvendor Problem with Random Yield and Reference Dependence," Mathematics, MDPI, vol. 8(8), pages 1-15, July.
    12. Xin-Sheng Xu & Felix T. S. Chan, 2019. "Optimal Option Purchasing Decisions for the Risk-Averse Retailer with Shortage Cost," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 36(02), pages 1-25, April.
    13. Li, Yanhai & Ou, Jinwen, 2020. "Optimal ordering policy for complementary components with partial backordering and emergency replenishment under spectral risk measure," European Journal of Operational Research, Elsevier, vol. 284(2), pages 538-549.
    14. Gaoke Wu & Bo Feng & Libin Guo, 2021. "Optimal Procurement Strategy for Supply Chain with Trade Credit and Backorder under CVaR Criterion," Sustainability, MDPI, vol. 13(18), pages 1-16, September.
    15. Wei Liu & Shiji Song & Ying Qiao & Han Zhao, 2020. "Supply Chain Coordination with a Loss-Averse Retailer and Combined Contract," Mathematics, MDPI, vol. 8(4), pages 1-20, April.
    16. Xiaoqing Liu & Gongli Luo & Xinsheng Xu, 2022. "Optimal Purchasing Decisions with Supplier Default in Portfolio Procurement," Mathematics, MDPI, vol. 10(17), pages 1-10, September.
    17. Doran Wood & Sıla Çetinkaya, 2024. "A comparative analysis of how to handle stockout scenarios: the impact of newsvendor’s risk attitude," Annals of Operations Research, Springer, vol. 338(2), pages 1187-1218, July.

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