The loss-averse newsvendor game

The loss-averse newsvendor game

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Article ID: iaor20101861
Volume: 124
Issue: 2
Start Page Number: 448
End Page Number: 452
Publication Date: Apr 2010
Journal: International Journal of Production Economics
Authors:
Keywords: newsboy problem, Nash equilibrium
Abstract:

This paper extends the standard newsvendor problem based upon risk neutrality to a game setting where multiple newsvendors with loss aversion preferences are competing for inventory from a risk-neutral supplier. We show that if the supplier allocates the total demand among the newsvendors proportional to their order quantities, then there exists a unique Nash equilibrium order quantity in this newsvendor game. We also find that while the demand-stealing effect increases the total order quantity of the newsvendors, the loss aversion effect decreases the newsvendors' total order quantity and if strong enough, may lead to a lower total inventory level of the decentralized supply chain than that of an integrated supply chain.

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