Newsvendor Game Research Articles

Newsvendor Competition with Endogenous Biases

Extensive studies have revealed that newsvendor decisions by human decision-makers are often biased by cognitive limitations, and, therefore, fail to achieve optimal profits prescribed by normative models. These biases are typically considered as liabilities in individual inventory decision-making, and much research has focused on developing methods to debias the decision-maker—for example, by providing decision support tools. However, in competitive settings biases can provide a competitive advantage, such that a biased newsvendor may earn a higher profit than an unbiased one. This raises the question of whether and when firms should debias their decision-makers. In this paper, we analyze decision biases that are endogenous rather than exogenous in competing newsvendor games. Specifically, we develop a two-stage game-theoretic model in which competing firms first select their decision-makers typefied by their bias levels, and then engage in a classic inventory competition game. Our analysis confirms the positive effect of the decision-maker’s bias on a firm’s economic outcome. However, this effect only appears in competitions in which decision biases are exogenously given. When biases are endogenously selected, firms are always (weakly) worse off than if they all had rational decision-makers. Our results suggest that debiasing at the industry level (e.g., adopting advanced inventory planning software) could benefit all players; however, individual firms do not have the incentive to do so in the absence of coordination mechanisms.

Is RFID adoption a double-edged sword? The impacts of a capital-constrained manufacturer

This paper uses a newsvendor game model to investigate RFID adoption strategy in a supply chain incorporating a retailer with misplaced inventory problem and a capital-constrained manufacturer who has limited access to the advanced payment financing or the peer-to-peer (P2P) financing. Our work endeavors to investigate the interaction between supply chain members’ RFID adoption strategy and the manufacturer’s financing decision. We solve the model analytically and obtain several interesting findings. The RFID technology can be adopted precisely when the unit RFID tagging cost falls below a certain threshold. One Surprising finding is that RFID adoption has two effects, a negative effect can exacerbate the manufacturer’s financial difficulties, and a positive effect can alleviate or even essentially change the manufacturer’s financial status. However, such fundamental changes are restricted by the size of retailer’s misplacement rate. Also surprisingly, we expose that the manufacturer’s financing decision is significantly influenced by RFID adoption strategy at a middle level of initial capital. With the differentiated sizes of the lower limit of initial capital, the manufacturer will adjust financing decision in response to RFID adoption strategy.

Pull-to-center is not just for newsvendors.

The pull-to-center effect is a systematically observed suboptimal behavior in newsvendor experiments. Various explanations have been forward for this phenomenon, some of which are based on structural properties of the task while others are based upon the inventory context of the problem. To help distinguish between these two types of explanations, we compare behavior in a newsvendor game to behavior in a new, mathematically isomorphic, price gouging game. Our laboratory experiments replicate the standard results for newsvendors and yield the equivalent pattern in the price gouging game. This suggests previously observed newsvendor behavior is driven by structural aspects of the task consistent with models like prospect theory and impulse balance rather than context specific explanations pertaining to inventory management.

Technical Note—A Monge Sequence-Based Approach to Characterize the Competitive Newsvendor Problem

Replicating cash flows of multiple agents in game-theoretic settings tends to be a challenging task. In this paper, we consider the competitive newsvendor game where multiple newsvendors choose inventory levels before demand arrival and the unmet demand of each newsvendor spills over to multiple other newsvendors. We show that this spillover behavior and the resulting cash flows of each newsvendor can be replicated within a transportation problem after assigning artificial costs on spillover behavior. This replication provides an opportunity to study structural properties of the problem, as well as determine the equilibrium of the game. This paradigm of using artificial costs within an optimization framework to replicate agents’ cash flows can be used in many other games as well.

Oligopoly newsvendor competition with reference effects

We analyze the equilibrium of a behavioral newsvendor game featuring oligopoly competition, where each newsvendor’s decision is driven by a reference effect regarding her potential profit. We find that the equilibrium order quantities are characterized by behavioral critical fractiles, where each newsvendor only accounts for the actions of competitors with smaller behavioral critical fractiles. Our result generalizes findings from recent literature on duopoly newsvendor competition with reference effects.

Technical Note—Robust Newsvendor Games with Ambiguity in Demand Distributions

Title: Should newsvendors cooperate if the demand distribution is unknown?

Purchase and retrieval competition for seasonal produce

AbstractWe study the competition problem of purchase and multiretrieval of perishable seasonal produce, where wholesalers purchase and stock their products in the first period, and then retrieve and sell them in subsequent periods. We first consider the duopoly case and assume that the prices are exogenous and fluctuate. In each period, after the price realization, the wholesalers retrieve some stock from their warehouses to satisfy their demands. One wholesaler's unsatisfied customers can switch to another and be satisfied by its left retrieved products. Any unsold retrieved stock has no salvage value and any unsatisfied demand is lost. The unretrieved stock is carried to the next period at a perishable rate. The wholesalers compete for the substitute demand by determining their own purchase and retrieval quantities. We show the existence and uniqueness of a pure‐strategy Nash equilibrium, and that the Nash equilibrium strategy has the simple “sell‐down‐to” structure. We also consider the general N‐person game and show the existence of the Nash equilibrium, and characterize the structure of the equilibrium strategy for the symmetric case. In addition, we consider the case with endogenous prices, and show that the problem reduces to a repeated newsvendor game with price and inventory competition. We derive the conditions under which a unique Nash equilibrium exists and characterize the equilibrium strategy. Finally, we conduct numerical studies to examine the impacts of the model parameters on the equilibrium outcomes and to generate managerial insights.

Newsvendor Game: A Behavioral Exercise in Decision Making under Risk

ABSTRACTThe newsvendor problem is a classic problem of decision making under risk that is taught in traditional Operations and Supply Chain Management classes as a single‐period inventory problem. We discuss the following three pedagogical points of interest to any instructor tasked with teaching this topic: a) why the newsvendor model is relevant in this day and age; b) how to make better sense of the newsvendor problem for students; and c) how to easily implement and administer an active learning exercise in either a traditional classroom, or an online setting. This active learning exercise is a quick, effective, and meaningful way of demonstrating a variety of concepts related to the newsvendor problem that include: a) the rational economic method of calculating optimal order quantity, b) the inherent risk in forecasting and ordering decisions as they relate to surpluses and shortages; and c) the cognitive limitations in decision making that often result in irrational but predictable decision‐making behavior as demonstrated by empirical research on newsvendor behavior. This exercise can help instructors and students transition into broader discussions on human behavior, cognitive limitations, and perceptions of risk. Overall, it should provide the student with an improved understanding of the operational and behavioral issues associated with decision making under risk.

Flexibility in Long-Term Relationships: An Experimental Study

Problem definition: We compare two types of contracts that can govern business partnerships: indefinitely binding agreements (IBAs), wherein partners are bound together in a relationship of indefinite duration, and temporarily binding agreements (TBAs), wherein they are able to dissolve the relationship at any moment. Academic/practical relevance: Managers need to determine what type of contract they want to engage in with their business partners. Although Toyota famously argues for building strong, long-lasting relationships with its suppliers, such a commitment makes it difficult to escape from profit-losing relationships. Methodology: We conduct laboratory experiments in which subjects are matched in groups of two and play a two-person newsvendor game. In the IBA treatment, subjects are bound together; in the TBA treatment, they have the ability to dissolve their relationship and be subsequently rematched. We also consider a treatment where the subjects can choose between IBA and TBA, as well as treatments where dissolutions are made more difficult or lead to a fixed outside option rather than rematching. Results: We find that average earnings are higher in the IBA treatment. However, subjects in the TBA treatment with long-lasting partnerships tend to perform better than the average pair in IBA. We argue that TBA facilitates sorting between subjects, whereas IBA provides a greater incentive for forward-looking teaching behavior among subjects. When given the choice, most subjects choose TBA and do better than when the type of contract is imposed on them, irrespective of their choice. We also see evidence of better performance when dissolutions are no longer automatic upon request or lead to the subjects exiting the rematching pool. Managerial implications: Having the flexibility to dissolve a relationship can be beneficial—but this option must be used wisely. When entering into partnerships with suppliers and customers, managers should balance out the teaching benefits of long-term contracts, with the potential drawbacks of unpunished disingenuous behavior. Short-term contracts may be preferable if the parties can refrain from breaking up the partnership in dark times, which are beyond the control of the business partners.

Population Monotonicity in Newsvendor Games

A newsvendor game allows the players to collaborate on inventory pooling and share the resulting total cost. There are several possible ways to allocate the cost. Previous studies have focused on t...

Game-Theoretic Analysis of Price and Quantity Decisions for Electric Vehicle Supply Chain Under Subsidy Reduction

To avoid the negative effects of electric vehicle (EV) subsidies, the Chinese government has launched an EV subsidy reduction policy, resulting in market uncertainty for EV supply chains. We study the optimal decisions of EV manufacturers and EV sellers by considering the subsidy reduction policy and stochastic demand of the EV market. We develop a newsvendor game model of a two-stage EV supply chain, and analyze how four factors—the degree of subsidy decline, the level of research and development (RD (2) The key factors for stimulating the development of the EV market are the RD (3) Improvement in EV market demand will increase market competition and market vitality; (4) The two decision maker-framework under centralized decision making is more advantageous to the popularization and development of EVs. When centralized decision making is difficult, a coordinated strategy under decentralized decision making can yield the same results as centralized decision making.

Can irrelevant benchmark information help when making business decisions under uncertainty? An empirical investigation of the newsvendor game

Firms often compensate employees based on their relative performance in the most recent business period. These firms need to consider what type of performance information to share with their employees in order to obtain better outcomes in the long run, without diminishing staff motivation. In this paper, we empirically investigate the impact of sharing irrelevant benchmark “information” (e.g., information about the interim winner's performance) when individuals are making repeated decisions under uncertainty. The decision-making context used is the newsvendor problem, which is a canonical framework for operations management decision making. The newsvendor problem occurs in many business contexts, such as buying fashion goods for retail, setting safety stock levels, setting target inventory levels for perishable goods, selecting the right capacity for a service facility, and overbooking customers. Theoretically, information about the interim winner's performance has no value for making improved decisions in future rounds, and it might even be misleading. Surprisingly, we find that displaying such irrelevant benchmark information results in significantly improved decisions overall, as compared to a control group; this additional display may motivate participants to perform better. We also identify two personality traits related to impulsivity which moderate this positive information display effect.

Group decision making in Newsvendor game: a pilot human experiment

Well established behavioral studies in Operations Management highlight that the Human’s behaviour deviates from the optimal solution, even in simplified operating conditions such as those represented by the famous Newsvendor problem. Built on the results of controlled human experiments, this study proposes a decision-making model that accounts for the heuristics of anchoring and adjustment. Two experimental conditions, differing in the provision of demand information to couple of decision makers, are used to generate data. The model estimated shows that anchoring and adjustment behaviour differs in the two conditions: demand information knowledge enables smoothing partially the pull to center effect.

A stochastic newsvendor game with dynamic retail prices

We extend stochastic newsvendor games with information lag by including dynamic retail prices, and we characterize their equilibria. We show that the equilibrium wholesale price is a nonincreasing function of the demand, while the retailer's output increases with demand until we recover the usual equilibrium. In particular, it is then optimal for retailer and wholesaler to have demand at least equal to some threshold level, beyond which the retailer's output tends to an upper bound which is absent in fixed retail price models. When demand is given by a delayed Ornstein-Uhlenbeck process and price is an affine function of output, we numerically compute the equilibrium output and we show that the lagged case can be seen as a smoothing of the no lag case.

Salient compromises in the newsvendor game

The newsvendor problem denotes the puzzle that a retailer facing an uncertain demand for some product underreacts to profit margins, and hence adjusts the order quantity toward the expected demand. Due to its range of applications in operations management, this problem has drawn much interest in recent years. Various articles have tried to reconcile the newsvendor problem with loss aversion under ad hoc assumptions on the underlying reference point. We, instead, argue that the newsvendor problem is an application of the well-studied compromise effect. As the compromise effect is based on violations of the IIA axiom, we argue that models of context-dependent behavior, such as salience theory, better explain newsvendor-like behavior than loss aversion-based models. We conduct a novel experiment which allows us to clearly distinguish between the role of loss aversion and salience, and find strong support for the latter. Thereby, we also add to the agenda of comparing loss aversion-based models and salience theory.

Population Monotonicity in Newsvendor Games

A newsvendor game studies whether players can collaborate on inventory pooling, where the cost allocation is usually analyzed by the notion of core in cooperative game theory. It is known that the core of the newsvendor game is non-empty and one can use duality theory in stochastic programming to construct an allocation - referred to as the dual-based allocation scheme - belonging to the core. Yet, an allocation that lies in the core does not necessarily guarantee the unhindered formation of a coalition, as some existing members' allocated costs may increase when new members are added in the process. In this work, we use the concept of population monotonic allocation scheme (PMAS), which requires the cost allocated to every member of a coalition to decrease as the coalition grows, to study allocation rules in a growing population. We show that when the demands faced by the newsvendors are independent, log-concavity of their distributions is sufficient to guarantee the existence of PMAS. Specifically, for continuous demands, log-concavity ensures that the game is convex, which in turn implies PMAS exists. We also show that under the same condition the dual-based allocation scheme is a PMAS. For discrete and log-concave demands, however, the game may no longer be convex but we manage to show that the dual-based allocation scheme is a PMAS. When the demands are dependent, the game is in general not convex and we derive a sufficient condition based on the dependence structure, measured by the copula, between each player and the coalition to secure that the dual-based allocation scheme is still a PMAS.

A behavioural analysis of the newsvendor game: Anchoring and adjustment with and without demand information

Production systems are the combined result of technologies, organization, and individual behaviour. The impact of the human factor on the efficacy and efficiency of production systems is difficult to predict, since it often escapes the predictions of orthodox models of rationality. Recent behavioural studies in Operations Management highlight that the Human’s behaviour deviates from the optimal solution, even in simplified operating conditions such as those represented by the famous Newsvendor problem. Building on the results of controlled human experiments, this study proposes a decision-making model that accounts for the heuristics of anchoring and adjustment. Two experimental conditions, differing in the provision of demand information to decision makers, are used to generate data. The model estimated shows that anchoring and adjustment behaviour differs in the two conditions.

An evolutionary approach for supply chain management

This paper aims to provide a simple pragmatic approach for supply chain management, departing from the current mainstream chase on supply chain integration. We first summarise two dominant but opposite approaches, the decentralised traditional approach and the centralised supply chain management approach, each of which has its distinct strengths and obvious weaknesses. To take advantage of their strengths and overcome their weaknesses, an evolutionary approach is laid out by applying key insights of the theory of evolution - self-interest, adaptation, and natural cooperation, and of supply chain management - demand and supply evolution. We propose an evolutionary approach that integrates four rudimentary advantages: the organisation fulfils its own interest, the organisation is better adapted to its local environment, natural cooperation is built on direct reciprocity, and demand and supply evolution provides a differential preservation of interrelations between suppliers and buyers. A two-stage newsvendor game illustrates its practical implication, which confirms the evolutionary approach is a legitimate alternative to the current systems integration approach for supply chain management.

Dynamic linear programming games with risk-averse players

Motivated by situations in which independent agents wish to cooperate in some uncertain endeavor over time, we study dynamic linear programming games, which generalize classical linear production games to multi-period settings under uncertainty. We specifically consider that players may have risk-averse attitudes towards uncertainty, and model this risk aversion using coherent conditional risk measures. For this setting, we study the strong sequential core, a natural extension of the core to dynamic settings. We characterize the strong sequential core as the set of allocations that satisfy a particular finite set of inequalities that depend on an auxiliary optimization model, and then leverage this characterization to establish sufficient conditions for emptiness and non-emptiness. Qualitatively, whereas the strong sequential core is always non-empty when players are risk-neutral, our results indicate that cooperation in the presence of risk aversion is much more difficult. We illustrate this with an application to cooperative newsvendor games, where we find that cooperation is possible when it least benefits players, and may be impossible when it offers more benefit.

News-vendor game-based resource allocation scheme for next-generation C-RAN systems

Recently, Cloud Radio Access Network (C-RAN) has been emerging as a cost-effective solution supporting huge volumes of mobile traffic in the big data era. C-RAN provides infrastructure layer services to mobile users by managing virtualized infrastructure resources. To exploit next-generation C-RAN operations, a main challenging issue is how to properly control system resources. In this study, we propose a novel resource management scheme for C-RAN systems. By employing the news-vendor game model, we investigate a resource allocation problem with bargaining solutions. In dynamic C-RAN environments, our game-based resource management approach can practically adapt current system conditions while maximizing the expected payoff. The main contribution of our study lies in the fact that we shed a new light on adaptive resource allocation policies for virtualized cloud environments. Simulation results demonstrate that our proposed scheme can obtain a considerably better system performance than other existing schemes.