The Impact of a Target on Newsvendor Decisions

Posted: 8 Oct 2012

See all articles by Lucy Gongtao Chen

Lucy Gongtao Chen

NUS Business School, National University of Singapore

Zhuoyu Long

affiliation not provided to SSRN

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: September 12, 2012

Abstract

In this paper we investigate the impact of a target on newsvendor decisions. Diff erent to the existing approach that maximizes the probability of the profi t reaching the target, in this paper we model the e ffect of a target by maximizing the satis ficing measure of a newsvendor's profi t with respect to that target. We study two satisfi cing measures: CVaR satisfi cing measure that evaluates the highest con fidence level of CVaR achieving the target; and Entropic satisfi cing measure that assesses the smallest risk tolerance level under which the certainty equivalent for exponential utility function achieves the target. For both satis ficing measures, we find that the optimal ordering quantity increases with the target level. Further, the newsvendor orders more than the risk-neutral solution (over-order) sometimes and less than that (under-order) other times, depending on the target level. The more interesting fi nding is that if the target is proportional to the unit marginal profi t and is also determined by only one other demand-related factor, then the newsvendor over-orders low-profi t product and under-orders high-profi t product. This is consistent with the existing fi ndings in newsvendor experiments, and suggests that our modelling framework may provide a potential explanation for the behavioral findings.

Keywords: newsvendor, risk measure, target profit

Suggested Citation

Chen, Lucy Gongtao and Long, Zhuoyu and Perakis, Georgia, The Impact of a Target on Newsvendor Decisions (September 12, 2012). Available at SSRN: https://ssrn.com/abstract=2158560

Lucy Gongtao Chen (Contact Author)

NUS Business School, National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore
6565163013 (Phone)

Zhuoyu Long

affiliation not provided to SSRN ( email )

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-565
Cambridge, MA 02142
United States

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