Demand uncertainty reduction among competing retailers

Meng Li

Production and Operations Management, 2023, vol. 32, issue 6, 1994-2001

Abstract: While the existing literature has studied the impact of demand uncertainty extensively within various monopoly settings, there is little research on its impact among competitive retailers. In this paper, we study the effects of demand uncertainty reduction in a setting with two newsvendor retailers competing on product availability. We parameterize the uncertainty level via a mean‐preserving spread and investigate the behavior of both retailers' equilibrium stocks and their expected profits in response to demand uncertainty reduction. We find that as one retailer's demand uncertainty decreases, it might move its order quantity away from the demand mean, which contrasts with the “pull‐to‐center” effect in the monopoly setting. Moreover, we show that as a retailer's demand uncertainty decreases, its own equilibrium profit increases while that of its competitor decreases.

Date: 2023
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