Abstract
This paper incorporates the recently-proposed optimism-based reference point formulation into a competitive newsvendor model. The analysis shows that the heterogeneity of newsvendors' reference points can explain several regularities observed in recent experimental studies of newsvendor competition. Specifically, the observations that a behavioral newsvendor may ignore the orders of the competitor, receive a significantly smaller profit, or over-order when there is no expected demand overflow can all be attributed to the effects of heterogeneous reference points in our model's equilibrium. Extending the model to a two-tier supply chain also provides insights onto how behavioral biases impact wholesale price contracts.
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