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Newsvendor Models with Alternative Risk Preferences Within Expected Utility Theory and Prospect Theory Frameworks

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Handbook of Newsvendor Problems

Part of the book series: International Series in Operations Research & Management Science ((ISOR,volume 176))

Abstract

Newsvendor models are widely used in the literature, and usually based upon the assumption of risk neutrality. Recently there is a growing body of literature that attempts to use alternative risk preferences rather than risk neutrality to describe the newsvendor decision-making behavior. In this chapter, we provide an overview of newsvendor models with alternative risk preferences within the expected utility theory and prospect theory frameworks and identify some directions for future research.

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Notes

  1. 1.

    Within the EUT framework, a risk-neutral decision maker’s utility function U(W) satisfies U ′(W) > 0 and U ′′(W) = 0 for all W (i.e., a linear utility function), whereas a risk-loving decision maker’s utility function U(W) satisfies U ′(W) > 0 and U ′′(W) > 0 for all W (i.e., a convex utility function).

  2. 2.

    To simplify analysis, we assume I = [0, ∞). We refer interested readers to Wang et al. (2009) and Wang and Webster (2009) for newsvendor analyses based upon a more general demand assumption of I = [a, b] where a = 0 and b > a.

  3. 3.

    For example, Eeckhoudt et al. (1995) consider a newsvendor who is allowed to obtain additional newspapers at a cost c’ satisfying c < c ′ < p. Thus, the newsvendor is still able to make money from replenishment orders to satisfy unmet demand (i.e., the shortage cost penalty is \(s = {c}^{{\prime}}- p \in (c - p, 0)\)).

  4. 4.

    Wang and Webster (2009) and Wang and Webster (2007) are based upon Chap. 3 and 4 of Wang’s (2003) doctoral dissertation.

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Authors and Affiliations

  1. School of Management, State University of New York, Buffalo, NY, 14260, USA

    Charles X. Wang

  2. Whitman School of Management, Syracuse University, Syracuse, NY, 13210, USA

    Scott Webster

  3. Chinesisch-Deutsches Hochschulkolleg, Tongji University, Shanghai, 200092, China

    Sidong Zhang

Authors
  1. Charles X. Wang
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  2. Scott Webster
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  3. Sidong Zhang
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Correspondence to Charles X. Wang .

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Editors and Affiliations

  1. , Institute of Textiles and Clothing, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong SAR

    Tsan-Ming Choi

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Wang, C.X., Webster, S., Zhang, S. (2012). Newsvendor Models with Alternative Risk Preferences Within Expected Utility Theory and Prospect Theory Frameworks. In: Choi, TM. (eds) Handbook of Newsvendor Problems. International Series in Operations Research & Management Science, vol 176. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-3600-3_7

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