Decision bias in the newsvendor problem and supply chains

This research effort is concerned with development of alternative choice models to risk neutrality to describe manager's decision-making behavior in the classic newsvendor problem and supply chains. We first consider a risk-averse newsvendor problem within the expected utility theory (EUT) framework; we next study a loss-averse newsvendor problem within Prospect Theory framework; finally we analyze a supply chain problem with one or more newsvendor-like loss-averse retailers. To exploit the mathematical structure and managerial insights peculiar to each problem, we examine them separately.; We first study a risk-averse newsvendor model and find that a risk-averse newsvendor will order less as selling price gets larger once price is beyond a certain threshold value. This is a counter-intuitive result showing a limitation of using risk aversion within EUT to study the newsvendor problem.; Our second effort concerns a newsvendor with a piecewise-linear loss aversion utility function. In the single-period model, we find a loss-averse newsvendor will order less than the risk-neutral newsvendor if he faces low shortage cost but will order more than the risk-neutral newsvendor if he faces high shortage cost. In the corresponding multi-period model, we identify conditions under which the solution to the multi-period model is stationary and myopic.; Our last effort is devoted to a supply chain model in which a risk-neutral manufacturer is selling to one or more loss-averse retailers facing the newsvendor problem. We find a loss-averse retailer with low shortage cost will order systematically less than the integrated supply chain; while if the shortage cost is high, the retailer will order systematically more than the integrated supply chain. We design two types of contracts to coordinate the supply chain: the first one is a returns policy and the second one is a loss-sharing contract. We find both contracts can achieve channel coordination. We then turn our attention to a supply chain with multiple competing loss-averse retailers. We find that while demand-stealing effect from competition may cause the retailers to order more, loss aversion may cause the retailers to order less.