Buyback and stockout penalty newsvendor model based on reference point prospect theory

• DOI: 10.1007/s10586-018-2451-1
• Publication Date: 2018-03-12T08:21:46Z
• Authors: Zhiqiang Cao; Zheng Yang; Fang Liu; Ziyu Ye
• Keywords: Newsvendor model; Stockout; Tipping point (physics)

Expected utility theory is as main analysis of newsvendor problem, which has generally accepted as a normative model of rational choice. However, various independent experimental studies have shown the actual order quantity of decision maker deviates from the theoretical optimal order quantity. In the framework of prospect theory, the newsvendor experimental results are interpreted by compromise decision value as a reference point. And we join the buyback contract and stockout penalty factors and calculate respectively newsvendor optimal order quantity in three situations respectively. And then prove the monotonicity the optimal order quantity with loss aversion coefficient, buyback price and stock-out penalties.