Title

Decision bias in the newsvendor problem and supply chains

Date of Award

2003

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Business Administration

Advisor(s)

Scott Webster

Keywords

Decision bias, Newsvendor problem, Supply chains

Subject Categories

Business | Business Administration, Management, and Operations

Abstract

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.

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