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An inventory system with quasi-hyperbolic discounting rate

Author

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  • Xiaobo Zhao
  • Yun Zhou
  • Jinxing Xie

Abstract

In this article, we consider a periodic-review inventory system with stochastic demands for an infinite horizon, where the manager has a time-inconsistent preference with a quasi-hyperbolic discounting rate. We model the inventory system as an intra-personal sequential decision problem. It is shown that the ordering decision follows a base-stock policy but has a systematic bias in that the base-stock level is lower than the standard optimal level. We extend our analysis to a supply chain that is composed of a perfectly rational supplier and a quasi-hyperbolic retailer. The results show that the time-inconsistent preference of the retailer can cause considerable loss in system performance. We propose a contract with a delay-in-payment and income-sharing for such a supply chain. The results show that the contract can effectively un-bias the ordering decision of the retailer and can reach the goal of coordinating the supply chain to improve the performance.

Suggested Citation

  • Xiaobo Zhao & Yun Zhou & Jinxing Xie, 2017. "An inventory system with quasi-hyperbolic discounting rate," IISE Transactions, Taylor & Francis Journals, vol. 49(6), pages 593-602, June.
    • Handle: RePEc:taf:uiiexx:v:49:y:2017:i:6:p:593-602
    DOI: 10.1080/24725854.2017.1303763
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    Cited by:

    1. Sha, Yue & Zhang, Junlong & Cao, Hui, 2021. "Multistage stochastic programming approach for joint optimization of job scheduling and material ordering under endogenous uncertainties," European Journal of Operational Research, Elsevier, vol. 290(3), pages 886-900.

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