Abstract:We provide an experimental study of newsvendor ordering behavior, when information available to the decision makers under the traditional newsvendor setting, such as price and cost levels, and the underlying demand distribution, are not known. We assess subjects’ decisions with respect to the normative, i.e., expected profit maximizing, order levels, total profits generated, and the mismatch cost, i.e., the cost of uncertainty, incurred. Our results show that, although order decisions deviate significantly from expected profit maximizing levels under all conditions, they move closer to normative benchmarks when the underlying demand distribution is known. Having information about price and/or cost levels, on the other hand, does not improve decisions, and may lead to orders significantly farther away from the normative orders compared to when this information is not available. Our studies show decision makers generate significantly higher profits when cost and price levels are not known, compared to when decision makers have full information. We observe that mismatch costs incurred are significantly lower when information about the demand distribution is available to the decision makers. We also explore several possible drivers of the behavior observed in our studies, such as loss aversion, anchoring and adjustment, and demand chasing.
Bio: Ayşe Kocabıyıkoğlu is an Assistant Professor of Decision Sciences at Bilkent University in Ankara, Turkey, and holds a PhD in Decision Sciences from INSEAD, and MS and BS degrees from Middle East Technical University. Her research is at the interface of decision sciences and behavioral operations, and her research interests include behavioral operations management, pricing and revenue management, and dynamic decision making. Her work has featured in leading academic journals such as Management Science, Operations Research and Production & Operations Management.