A bilevel optimization model for the newsvendor problem with the focus theory of choice

The newsvendor problem is formulated with the focus theory of choice in which instead of using the expected utility in the existing approaches, the optimal order quantity is determined as per which order quantity's focus (the most salient demand) is the most preferred. This new formulation is a bilevel optimization problem in which the lower level chooses the focus of each order quantity and the upper level determines the optimal order quantity. The proposed model has maximin upper and lower level programs that are nonsmooth. We derive the optimal order quantity under this new framework and characterize the properties of the optimal solution. The proposed model provides a new perspective to analyze the newsvendor problems.

Automated summary

The newsvendor problem is a bilevel optimization problem that determines the optimal order quantity using the focus theory of choice. The proposed model provides a new perspective to analyze the problem.