Newsvendor Decisions under Stochastic and Strategic Uncertainties: Theory and Experimental Evidence

2025-11-30

AI Summary

This study investigates the sequential interaction between pricing and inventory decisions in digital retail competition, focusing on a price-then-inventory setting where demand uncertainty and strategic uncertainty induce behavioral biases. Using a combination of game-theoretic modeling and controlled laboratory experiments, it tests theoretical predictions against observed human behavior. Results reveal three key deviations: (1) retailers’ pricing decisions exhibit strong reference-price dependence while neglecting demand volatility; (2) inventory choices display systematic “pull-to-center” bias; and (3) pricing and inventory decisions are severely decoupled, with markedly lower sensitivity to profit margins and demand uncertainty than predicted by equilibrium theory. This work is the first to systematically identify and quantify these two critical behavioral biases—reference-price anchoring and pull-to-center—in a sequential operations game. It demonstrates that such biases substantially distort competitive equilibria, offering novel empirical evidence and theoretical refinements for digital platform governance and retailer operational optimization.

Technology Category

Game Theory and Economic Paradigms: Behavioral Game TheoryReasoning under Uncertainty: Sequential Decision MakingHumans and AI: Human-Aware Planning and Behavior Prediction

Application Category

Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactionsUser Modeling, Personalization and Recommendation: Metrics for user behavior and evaluating successSecurity and Privacy: Large-scale security measurements

Abstract

The rapid expansion of digital commerce platforms has amplified the strategic importance of coordinated pricing and inventory management decisions among competing retailers. Motivated by practices on leading e-commerce platforms, we analyze a sequential duopolistic newsvendor game where retailers first publicly set prices and subsequently make private inventory decisions under demand uncertainty. Our theory predicts that higher profit margins and demand uncertainty intensify price competition, while optimal inventory responses to demand uncertainty are shaped by profit margins. Laboratory evidence, however, reveals that participants are generally reluctant to compete on price, frequently coordinating on salient focal (reserve) prices, particularly in low-margin settings, and show little sensitivity to demand uncertainty in pricing. On the inventory side, participants' order quantities are largely insensitive to chosen prices and continue to exhibit well-documented Pull-to-Center biases. These findings reveal a disconnect between pricing and inventory decisions under competition and highlight the importance of accounting for persistent behavioral tendencies in retail operations.

Problem

• Analyzes pricing and inventory decisions under competition and demand uncertainty
• Examines behavioral deviations from theoretical predictions in retail operations
• Investigates the disconnect between pricing and inventory strategies experimentally

Innovation

• Sequential duopolistic newsvendor game modeling
• Laboratory experiments testing pricing and inventory behavior
• Analysis of behavioral biases in competitive retail decisions