Heterogeneity of Reference Effects in the Competitive Newsvendor Problem

Manufacturing & Service Operations Management, Forthcoming

19 Pages Posted: 30 Jun 2016 Last revised: 4 Jan 2018

See all articles by Samuel Kirshner

Samuel Kirshner

University of New South Wales (UNSW)

Anton Ovchinnikov

Smith School of Business - Queen's University; INSEAD - Decision Sciences

Date Written: December 17, 2017

Abstract

This paper demonstrates the mathematical equivalence between two recently proposed reference effect formulations for the newsvendor problem and then extends them to a competitive setting. The analysis of the resultant game shows that the heterogeneity of reference effects can explain multiple regularities observed in recent experimental studies of newsvendor competition. In particular, our model explains the main experimental finding that one newsvendor tends to ignore the policy of its competitor. Other experimental observations such as profit disparity, underordering in a high-margin scenario, and overordering when there is no expected overflow can all be attributed to the heterogeneity of reference effects in our model's equilibrium. In addition to explaining these observations, our model also produces a number of new testable hypotheses regarding the competitive newsvendor behavior.

Keywords: Behavioral Operations, Competitive Newsvendor, Prospect Theory, Reference Points

Suggested Citation

Kirshner, Samuel and Ovchinnikov, Anton, Heterogeneity of Reference Effects in the Competitive Newsvendor Problem (December 17, 2017). Manufacturing & Service Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2801526 or http://dx.doi.org/10.2139/ssrn.2801526

Samuel Kirshner (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Anton Ovchinnikov

Smith School of Business - Queen's University ( email )

143 Union Str. West
Kingston, ON K7L3N6
Canada

INSEAD - Decision Sciences ( email )

United States

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