The loss-averse newsvendor game

This paper extends the standard newsvendor problem based upon risk neutrality to a game setting where multiple newsvendors with loss aversion preferences are competing for inventory from a risk-neutral supplier. We show that if the supplier allocates the total demand among the newsvendors proportional to their order quantities, then there exists a unique Nash equilibrium order quantity in this newsvendor game. We also find that while the demand-stealing effect increases the total order quantity of the newsvendors, the loss aversion effect decreases the newsvendors' total order quantity and if strong enough, may lead to a lower total inventory level of the decentralized supply chain than that of an integrated supply chain.