Overconfident Distribution Channels

Meng Li

Production and Operations Management, 2019, vol. 28, issue 6, 1347-1365

Abstract: We study the effects associated with overconfidence in distribution channels, where overconfidence is defined as a decision maker’s cognitive bias in perceiving the expected outcome of an uncertain event as more certain than it likely is. Although overconfidence bias always leads to a lower expected profit for a centralized channel, we find that overconfidence can in fact enhance the performance of a decentralized channel comprising one overconfident manufacturer and retailer. That is, overconfidence can reduce the double marginalization effect so that, compared to a decentralized channel managed by unbiased firms, the profit of an overconfident decentralized channel can be higher. In a similar vein, overconfidence bias can benefit, rather than hurt, either or both channel members. Our results shed some light on the design and adoption of strategies aimed at enhancing decisions and curtailing overconfidence bias of supply chain executives.

Date: 2019
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