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Optimal option purchase decision of a loss-averse retailer under emergent replenishment.
- Source :
- International Journal of Production Research; Jul2019, Vol. 57 Issue 14, p4594-4620, 27p, 1 Chart, 10 Graphs
- Publication Year :
- 2019
-
Abstract
- This paper studies the optimal option purchase of a loss-averse retailer under emergent replenishment. It is assumed that all or part of the excess demands in a stock-out situation can be replenished, and the loss-averse retailer's optimal option purchase quantity is investigated. It is found that the loss-averse retailer should not purchase options and only needs to replenish the inventory under certain conditions. When maximizing the expected utility without shortage cost, the loss-averse retailer's optimal option purchase quantity is decreasing in the loss aversion coefficient. To maximise the expected utility with shortage cost, a larger shortage cost implies a bigger option purchase quantity. If the shortage cost exists, there will be a loss on the expected profit and utility for the loss-averse retailer who selects an optimal option purchase quantity without shortage cost. Given the optimal option purchase quantity, it is proven that the loss-averse retailer's expected profit is decreasing in the loss aversion coefficient. Therefore the retailer should choose a proper loss aversion preference to balance between the two objectives of profit maximization and loss aversion preference. As a result of these findings, some management insights are recommended to the loss-averse retailer in selecting the option purchase quantity. [ABSTRACT FROM AUTHOR]
- Subjects :
- LOSS aversion
EXPECTED utility
PROFIT maximization
PURCHASING
RETAIL industry
Subjects
Details
- Language :
- English
- ISSN :
- 00207543
- Volume :
- 57
- Issue :
- 14
- Database :
- Complementary Index
- Journal :
- International Journal of Production Research
- Publication Type :
- Academic Journal
- Accession number :
- 137679781
- Full Text :
- https://doi.org/10.1080/00207543.2019.1579935