Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis

@article{Ho2010ReferenceDI,
  title={Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis},
  author={Teck-Hua Ho and Noah Lim and Tony Haitao Cui},
  journal={Management Science},
  year={2010},
  volume={56},
  pages={1891-1910}
}
We propose a behavioral theory to predict actual ordering behavior in multi-location inventory systems. The theory rests on a well-known stylized fact of human behavior: People’s preferences are reference-dependent. We incorporate reference-dependence into the newsvendor framework by assuming that there are psychological costs of leftovers and stock outs. We also hypothesize that the psychological aversion to leftovers is greater than the disutility for stock outs. We then experimentally test… CONTINUE READING