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

TL;DR

This paper studies how competing retailers set prices and manage inventory under demand uncertainty, revealing a gap between theoretical predictions and actual behavior observed in laboratory experiments.

Contribution

It introduces a duopolistic newsvendor model considering strategic pricing and inventory decisions, supported by experimental evidence highlighting behavioral deviations from theory.

Findings

Retailers tend to coordinate on focal prices rather than compete on price.

Order quantities are insensitive to prices and show Pull-to-Center bias.

Participants' behavior diverges from theoretical predictions, especially in low-margin scenarios.

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.