Impulse Balance and Multiple-Period Feedback in the Newsvendor Game

Axel Ockenfels and Reinhard Selten

Production and Operations Management, 2015, vol. 24, issue 12, 1901-1906

Abstract: type="main" xml:id="poms12399-abs-0001">

Human subjects in the newsvendor game place suboptimal orders: orders are typically between the expected profit-maximizing quantity and mean demand (“pull-to-center bias”). In previous work, we have shown that impulse balance equilibrium (IBE), which is based on a simple ex post rationality principle along with an equilibrium condition, can predict ordering decisions in the laboratory. In this study, we extend IBE to standing orders and multiple-period feedback and show that it predicts—in line with previous findings—that constraining newsvendors to make a standing order for a sequence of periods moves the average of submitted orders toward the optimum.

Date: 2015
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