How a competing environment influences newsvendor ordering decisions

Abstract

We conduct an experimental study on the decision biases in a scenario in which two newsvendors compete for a common market. If stock-out occurs at one newsvendor, the unsatisfied demand is reallocated to the competitor. Following the existing theory, an experiment of competing games with high- and low-profit settings is conducted with a control experiment of a standard newsvendor scenario for reference. The results indicate that compared with the single scenario, a competing environment can cause participants to significantly increase their ordering levels in the high-profit group and increase their ordering oscillations in the low-profit group. In addition, we propose a behavioural model by combining the logit choice rule and mental accounting. The model fits the experimental data satisfactorily, and the estimation of the parameters indicates that the participants in the high-profit group tend to ignore distractions from competitors, while the participants in the low-profit group are highly influenced by their competitors. Observations from this study suggest that managers should pay careful attention to different profit-margin products in a competing environment.

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