The risk-averse newsvendor problem with random capacity

This paper examines a single-period inventory problem with random capacity and demand, where the loss-averse preference is adopted to describe the newsvendor’s decision-making behavior. When the loss-averse newsvendor orders, the supplier has some random replenishment capacity. He will choose an order quantity to maximize his expected utility. The newsvendor’s optimal ordering policy is obtained, then the impacts of loss aversion, price, salvage value and cost on the optimal order quantity are analysed. Our research shows that the loss-averse newsvendor’s optimal order quantity is always less than the risk-neutral newsvendor’s. Moreover, the newsvendor’s optimal order quantity and expected utility are decreasing in the loss aversion level and purchasing cost, while increasing in selling price and salvage value. The numerical experiments are conducted to demonstrate our theoretical results.