Joint Inventory, Pricing, and Advertising Decisions with Surplus and Stockout Loss Aversions

Abstract

The newsvendor models considering decision-makers’ behavioral factors remain a fruitful research area in operation management field in past decade. In this paper, we further extend the current literatures to look into joint inventory, pricing, and advertising decisions considering loss aversion effects under the newsvendor setting. The purpose is to explore how the loss aversions affect the optimal policy of order quantity, price, and advertising effort level. We present an integrated utility model to measure both economic payoff and loss aversion utility of the newsvendor, where surplus loss aversion and stockout loss aversion are first separately defined and quantified. Then, we analyze the optimal solution conditions of the integrated model under exogenous and endogenous price cases, respectively. Under exogenous price case, we find that the uniquely optimal policy exists and is presented in the closed form. Under endogenous price case, the optimal policy is determined under mild conditions; we also provide the solutions when order quantity factor or advertising effort level is fixed in this case. In addition, the sensitivity analysis shows that the loss aversions affect the optimal decisions of order quantity, price, and advertising effort level in a systematic way.