Behavioral Ordering, Competition and Profits: An Experimental Investigation

Abstract

We investigate the impact of behavioral ordering on profits under competition. Specifically, we use controlled laboratory experiments to evaluate the differences in profits between a behavioral competitor (where a human places orders), and a management science‐driven competitor (where orders are placed according to one of several plausible policies based on existing literature and managerial practice). Unlike the full‐information game‐theoretic models that assume rational decision‐makers, these policies mimic practical situations by using less information and do not assume that their human competitors make fully rational decisions. Most prior literature focuses on non‐competitive settings, where behaviorally biased deviations from optimal order quantities result in small expected profit losses. In contrast, under competition, we find that human decision‐makers receive a substantially lower profit than the equilibrium expected profit, even as their competitors receive substantially higher profit.