A newsvendor model with multiple reference points: Target-setting for aspirational newsvendors

Abstract

Prospect theory posits that the determination of an outcome as a gain or loss hinges upon the reference points, thereby exerting a substantial influence on the decision-making processes of individuals. These reference points can encompass both external targets and internal aspirations (self-goals), forming two potential candidates. Despite a growing body of evidence showcasing the concurrent impact of multiple reference points on decision-makers’ choices, scant attention has been accorded to this phenomenon within the realm of operations management literature. In light of this, the present study delves into the influence wielded by an external target, functioning as a reference point, on the decisions and profitability of newsvendors who also harbor a well-defined aspiration (self-goal) reference point. The study introduces two distinct archetypes of newsvendors: the balanced newsvendors, adept at harmonizing personal needs with target attainment and thus navigating decisions influenced by dual reference points; and the focused newsvendors, singularly fixated on target realization and thereby governed by a sole target reference point. Our findings reveal that the effects of target-setting in boosting expected profits on both categories of newsvendors are contingent upon the specific value attributed to their self-goal. The implications of target-setting can either yield advantages or drawbacks, contingent upon the self-goal. This asymmetry in outcomes holds true for both balanced and focused newsvendors, with the former exhibiting a higher likelihood of deriving benefits from target-setting. Moreover, an exploration of scenarios wherein a newsvendor’s self-goal may undergo updates underscores the potential for further enhancement in the performance of balanced newsvendors.