Abstract
This paper investigates repetitive purchase decisions of perishable items in the face of uncertain demand (the newsvendor problem). The experimental design includes: high, or low profit levels; and uniform, or normal demand distributions. The results show that in all cases both learning and convergence occur and are effected by: (1) the mean demand; (2) the order-size of the maximal expected profit; and (3) the demand level of the immediately preceding round. In all cases of the experimental design, the purchase order converges to a value between the mean demand and the quantity for maximizing the expected profit.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Atkins PWB, Wood RE and Rutgers PJ (2002). The effects of feedback format on dynamic decision-making. Org Behav Human Decis Process 88: 587–604.
Bolton G and Katok E (2004). Learning-by-doing in the newsvendor problem: A laboratory investigation of the role of experience and feedback. Working Paper, Smeal College of Business, Penn State University, http://lema.smeal.psu.edu/katok/BoltonKatok%2007-13-2004.pdf.
Carlson J and O'Keefe TB (1969). Buffer stocks and reaction coefficients: An experiment with decision making under risk. Rev Econ Stud 36: 467–484.
Crawford LE, Huttenlocher J and Engebretson PH (2000). Category effects on estimates of stimuli: Perception or reconstruction? Psychol Sci 11: 280–284.
Diehl E and Sterman J (1995). Effects of feedback complexity on dynamic decision-making. Org Behav Human Decis Process 62: 198–215.
Erev I and Barron G (2001). On adaptation, maximization, and reinforcement learning among cognitive strategies. Working Paper, Columbia University Business School.
Fisher M and Raman A (1996). Reducing the cost of demand uncertainty through accurate response to early sales. Opns Res 44(4): 933–946.
Gallego G and Moon I (1993). The distribution free newsboy problem: Review and extensions. J Opl Res Soc 44(8): 825–834.
Helson H (1964). Adaptation-Level Theory. Harper & Row: New York.
Hollingworth HL (1910). The central tendency of judgment. J Phil Psychol Scient Meth 7: 461–469.
Johnson J, Tellis GJ and Macinnis DJ (2005). Losers, winners, and biased trades. J Consum Res 32(2): 324–329.
Khouja M (1999). The single-period (news-vendor) problem: Literature review and suggestions for further research. Omega 27: 537–553.
Lau H-S and Lau AH-L (1997). A semi-analytical solution for a newsboy problem with mid-period replenishment. J Opl Res Soc 48(12): 1245–1259.
Nahmias S (1994). Demand estimation in lost sales inventory systems. Nav Res Logist 41: 739–757.
Petruzzi NC and Dada M (1999). Pricing and the newsvendor problem: A review with extensions. Opns Res 47(2): 183–194.
Schweitzer ME and Cachon GP (2000). Decision bias in the newsvendor problem with a known demand distribution: Experimental evidence. Mngt Sci 46(3): 404–420.
Shore H (2004). A general solution for the newsboy model with random order size and possibly a cutoff transaction size. J Opl Res Soc 55(11): 1218–1228.
Silver EA, Pyke DF and Peterson RP (1998). Inventory Management and Production Planning and Scheduling, 3rd edn. John Wiley: New York.
Sterman JD (1989). Modeling managerial behavior: Misperceptions of feedback in a dynamic decision making experiment. Mngt Sci 35: 321–329.
Whitin TM (1955). Inventory control and price theory. Mngt Sci 2: 61–80.
Acknowledgements
The authors would like to express their gratitude to the Open University of Israel for supporting this research.
Author information
Authors and Affiliations
Corresponding author
Appendices
Appendix A. Experiment instructions
-
This is a computerized experiment in decision-making. You will function as a retailer of a single product.
-
The experiment is composed of a large number of rounds in which you will be asked to make inventory decisions.
-
In each round you are able to order the product from your supplier at a wholesale cost. You will then sell the product to consumers at a higher price.
-
Consumer demand in each round is randomly selected from known distribution.
-
The prices and profits in every round will be in experiment tokens.
Possible scenarios
-
Overage—If fewer products are demanded than the quantity you ordered, you will have to dispose of some inventory (ie you cannot keep unused inventory for future periods).
-
Shortage—If more products are demanded than the quantity you ordered, you will have to forgo some sales.
Data after each round
After ordering the quantity from the supplier in each round, the realized demand and the profit will be presented to you.
Theoretical example
The decision screen. The decision screen will not change during the experiment. illustrationYou then decide your order quantity. And then press the confirm button. Assume that your order decision is: 380 units and the realized demand was: 136
The results screen.
Payment for experiment. Part of your payment will be fixed (10 NIS) and the other part depends on your profit/loss level.
Following the completion of the experiment, one of the rounds will be randomly picked and will determine the payment for the experiment. This means that the payment is dependent on the quality of your decision. The profit/loss of the picked round will be divided by 50 and added to a fixed sum of 10 NIS.
Assume that the profit in the chosen round was: 704
Your payment for the experiment will be: 10+(704)/50=24.08.
Appendix B. Average Order in 20-round Blocks
Figures B.1 and B.2
Average orders along 100 rounds for Uniform distribution low/high profit
Average orders along 100 rounds for Normal distribution low/high
Rights and permissions
About this article
Cite this article
Benzion, U., Cohen, Y., Peled, R. et al. Decision-making and the newsvendor problem: an experimental study. J Oper Res Soc 59, 1281–1287 (2008). https://doi.org/10.1057/palgrave.jors.2602470
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1057/palgrave.jors.2602470