How Competing Environment Influences Newsvendor's Ordering Decisions

We conduct an experimental study on the decision biases in a scenario where two newsvendors compete a common market, in which if stockout happens at a newsvendor, the unsatisfied demand is reallocated to his/her competitor. Following the existing theory, an experiment of competing game with high and low profit settings is designed, with equivalent ordering benchmarks as single newsvendor scenarios. The results show that the competing environment can induce participants to significantly increase the ordering level in the high profit group and increase the ordering oscillation in the low profit group. In addition, we propose a behavioral model by combining the logit choice rule and mental accounting. The model fits the experimental data satisfactorily, and the estimations of the parameters indicate that the participants in the high profit group like to ignore the distractions from competitors, while the participants in the low profit group are highly influenced by their competitors. The observations from this study suggest that managers should carefully pay attention to different profit-margin products in competing practice.