Decision Making and the Price Setting Newsvendor: Experimental Evidence

Date

2016-02-01

Author

KOCABIYIKOĞLU, AYŞE
GÖĞÜŞ, CELİLE ITIR
Gönül, Mustafa Sinan

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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We present an experimental study of the price-setting newsvendor problem, which extends the traditional framework by allowing the decision maker to determine both the selling price and the order quantity of a given item. We compare behavior under this model with two benchmark conditions where subjects have a single decision to make (price or quantity). We observe that subjects deviate from the theoretical benchmarks when they are tasked with a single decision. They also exhibit anchoring behavior, where their anchor is the expected demand when quantity is the decision variable and is the initial inventory level when price is the decision variable. When decision makers set quantity and price concurrently, we observe no significant difference between the normative (i.e., expected profit-maximizing) prices and the decision makers' price choices. Quantity decisions move further from the normative benchmarks (compared to when subjects have a single decision to make) when the ratio of cost to price is less than half. When this ratio is reversed, there is no significant difference between order levels in single- and multi-task settings. In the multidecision framework, we also observe a tendency to match orders and expected demand levels, which subjects can control using prices.

Subject Keywords

Management of Technology and Innovation, Strategy and Management, General Business, Management and Accounting, Information Systems and Management

URI

https://hdl.handle.net/11511/52812

Collections

Department of Business Administration, Article