Ordering and sales effort investment for temperature-sensitive products considering retailer’s disappointment aversion and elation seeking

Abstract

We investigate a retailer’s optimal policy of ordering and sales effort investment for temperature-sensitive products in a stylised newsvendor setting considering the effects of the retailer’s disappointment aversion and elation seeking. We provide a function to describe the demand for temperature-sensitive products and a psychological utility function to capture the retailer’s perceived utility of disappointment aversion and elation seeking. Next, we construct four joint ordering and sales effort decision models by integrating the profit and psychological utility for high temperature-sensitive products, medium temperature-sensitive products, low temperature-sensitive products and high–low temperature-sensitive products, respectively. By solving the constructed models, we determine the optimal policy of order quantity and sales effort level. We find that the average temperature in the selling season, the temperature sensitivity parameter, disappointment aversion degree and elation seeking degree can affect the retailer’s optimal policy, and the trends and extents of the effects for each temperature-sensitive product may be different from those for the other temperature-sensitive products. Our models also suggest that the optimal policy for temperature-sensitive products is more conservative than the one for general non-temperature-sensitive products. The policy of a retailer who is primarily concerned with disappointment aversion is more conservative than the one of a disappointment-neutral retailer. The policy of a retailer who mainly focuses on elation seeking is more radical than the one of an elation-neutral retailer. Our results show that a retailer must consider the effects of temperature and psychological behaviour on policy and should make decisions regarding order quantity and sales effort level according to the temperature sensitivity type of selling products and degrees of disappointment aversion and elation seeking.

Keywords:

• behavioural operations management
• joint ordering and sales effort decision
• temperature-sensitive products
• disappointment aversion
• elation seeking