Heterogeneity, asymmetry and applicability of behavioral newsvendor models

In this paper we analyze heterogeneity and asymmetry of ordering behavior in high-profit and low-profit product settings as well as applicability of the reference dependent newsvendor model with different psychological costs of overordering and underordering. Further, we introduce a mean preserving newsvendor model by extending the overconfident newsvendor model to non-negative confidence parameters. For these models we provide simple and intuitive conditions on the operational and behavioral parameters that allow heterogeneity and asymmetry of ordering. We relate the psychological cost parameters of the reference dependent newsvendor model to the confidence parameters of the mean preserving model. Because of heterogeneity in ordering, the descriptive order quantities of an individual are not necessarily compatible with admissible behavioral parameter values of the model under consideration. Therefore, we use an endogenous approach to derive the behavioral parameter values from the descriptive order quantities, if possible. For the reference dependent newsvendor model, this approach enables us to derive constraints of the descriptive order quantities that guarantee admissible and realistic values of the psychological cost parameters. We give managerial interpretations of the analytical findings by a graphical illustration; the two behavioral models cover the whole area of plausible order quantity combinations for the low-profit and high-profit product. We discuss how an executive inventory manager could advice the newsvendor to adapt the behavioral parameters in order to achieve an expected profit target.