The Impact of a Target on Newsvendor Decisions
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Perakis-Georgia.pdf
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Author(s)
Chen, Lucy Gongtao
Long, Daniel Zhuoyu
Perakis, Georgia
Date Issued
October 2014
Journal
Manufacturing & Service Operations Management
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Citation
Chen, Lucy Gongtao, Daniel Zhuoyu Long, and Georgia Perakis. “The Impact of a Target on Newsvendor Decisions.” Manufacturing & Service Operations Management 17, no. 1 (February 2015): 78–86.
Version
Author's final manuscript
Abstract
Goal achieving is a commonly observed phenomenon in practice, and it plays an important role in decision making. In this paper, we investigate the impact of a target on newsvendor decisions. We take into account the risk and model the effect of a target by maximizing the satisficing measure of a newsvendor’s profit with respect to that target. We study two satisficing measures: (i) conditional value at risk (CVaR) satisficing measure that evaluates the highest confidence level of CVaR achieving the target; (ii) entropic satisficing measure that assesses the smallest risk tolerance level under which the certainty equivalent for exponential utility function achieves the target. For both satisficing measures, we find that the optimal ordering quantity increases with the target level. We determine an optimal order quantity for a target-based newsvendor and characterize its properties with respect to, for example, product’s profit margin.
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1287/msom.2014.0500
