Modeling Strategic Behavior in The Competitive Newsvendor Problem: An Experimental Investigation

Abstract

This study experimentally investigates ordering behavior in the competitive newsvendor problem. We consider a duopoly market setting with two identical newsvendors selling the same perishable goods in a common market. Our experimental results show that average observed orders systematically deviate from the Nash equilibrium, and exhibit a similar pull‐to‐center pattern as in the classic non‐competitive newsvendor experiments: average orders fall below the Nash equilibrium in the high‐margin condition, and above the Nash equilibrium in the low‐margin condition. More importantly, the observed orders in the duopoly market are significantly higher than that in the non‐competitive newsvendor market, even in situations where standard inventory models predict no difference. We explain the ordering behavior using a strategic experience‐weighted attraction (EWA) model, which captures players' propensities for strategic thinking in game settings. Our empirical analysis suggests that the strategic EWA model generates more accurate predictions of future ordering behavior than an existing linear adaptive model without concerning strategic thinking. Further analysis shows that individuals are heterogeneous in their propensities to be a strategic player. Our research indicates the importance of modeling strategic behavior when analyzing behavioral decisions in competitive (game) environments.

Behavioral Ordering, Competition and Profits: An Experimental Investigation

“…() showed that retailer c could model q h as a random variable following a distribution with mean and standard deviation ( μ , σ ), without having to worry about h 's potential response to c 's ordering behavior. Feng and Zhang () also found evidence of stochastic ordering behavior under competition, supported by their fitting of quantal response equilibria and experience weighted attraction models. Both Ovchinnikov et al.…”

Behavioral Operations and Supply Chain Management–A Review and Literature Mapping

“…There are also studies on behavioral factors that could improve decision making and mitigate risks of biased decisions in a newsvendor setting (e.g., Tomlin & Yimin, ; Bolton & Katok, ; Ockenfels & Selten, ; Ovchinnikov et al., ; Feng & Zhang, ). The ordering behavior could be affected by the background of the decisionmakers.…”

Internal and external reference effects in a two-tier supply chain

“…They showed that their model is capable of predicting newsvendor behavior and found that people are more sensitive to left-over inventory rather than lost sales. The latter finding has gathered further support from the experiments of Ovchinnikov et al (2015) and Feng and Zhang (2017).…”