Risk-Averse Newsvendor Model with Strategic Consumer Behavior

Abstract

The classic newsvendor problem focuses on maximizing the expected profit or minimizing the expected cost when the newsvendor faces myopic customers. However, it ignores the customer’s bargain-hunting behavior and risk preference measure of the newsvendor. As a result, we carry out the rational expectation (RE) equilibrium analysis for risk-averse newsvendor facing forward-looking customers who anticipate future sales and choose purchasing timing to maximize their expected surplus. We propose the equations satisfied by the RE equilibrium price and quantity for the risk-averse retailer in general setting and the explicit equilibrium decisions for the case where demand follows the uniform distribution and utility is a general power function. We identify the impacts of the system parameters on the RE equilibrium for this specific situation. In particular, we show that the RE equilibrium price for some risk-averse newsvendors is lower than for a risk-neutral retailer and the RE equilibrium stocking quantity for some risk-averse newsvendors is higher than for a risk-neutral retailer. We also find that the RE equilibrium sale price for a risk-averse newsvendor is decreasing in salvage price in some situations.