Solving Newsvendor Problems with the Focus Theory of Choice

Abstract

We propose a new newsvendor model with the focus theory of choice. Instead of calculating the expected utility, the model conceives that a retailer evaluates each order quantity by examining the most salient demand for him/her. The proposed model is a bilevel optimization problem with maximin upper and lower level programs that are nonsmooth. We derive the optimal order quantity and obtain the properties of the optimal solution. The proposed framework provides a new vehicle to handle newsvendor problems.

Keywords: Newsvendor model, focus theory of choice, expected utility, salience, bilevel optimization