The Loss-Averse Newsvendor Problem with Random Supply Capacity and Reference Point

This paper studies a newsvendor problem with random supply capacity, where the retailer is loss-averse and chooses the target unit profit as his reference point. The retailer's optimal order quantity is firstly obtained and is independent of supply capacity. Then we make a complete sensitivity analysis. It is shown that the optimal order quantity is decreasing in loss aversion level and reference point. We also find there exists a negative threshold of reference point, below which the effect of negative reference point will dominate that of loss aversion and then the loss-averse retailer will order more than the risk-neutral one. Moreover, the optimal order quantity is decreasing in wholesale price, while increasing in selling price and salvage value.