Decision behaviour and performance in a paired newsvendor: The role of peer effects

Abstract

The pull-to-center (PTC) effect refers to newsvendors’ behaviour of under-/overordering in high-/low-profit conditions. This paper examines the impact of peer effects on newsvendors’ decision behaviour and performance through laboratory experiments. We consider a paired newsvendor setting where subjects are randomly divided into pairs and are informed of their peers’ decisions and performance when they make order decisions, where peer effects arise. We find that subjects are unintentionally influenced by and intentionally learn from their peers’ decisions and ultimately manifest a peer-chasing behaviour (i.e., to chase peers’ decisions). Comparing with the single newsvendor setting, we further demonstrate the impact of the peer effect: (i) the peer-chasing behaviour can mitigate the PTC effect and hence improve the profit; (ii) the peer-chasing behaviour can counter the adverse effect of the demand-chasing heuristic; and (iii) the peer-chasing behaviour can theoretically reduce the variance of subjects’ order quantities and lead to a profit improvement. This paper contributes to the literature by first identifying the peer-chasing behaviour(s) and introducing a new debiasing strategy to mitigate the PTC effect via peer effects. We also propose an approach to link the level and adjustment behaviours, revealing how various adjustment behaviours affect the corresponding level behaviour.

Keywords:

• Behavioural OR
• heuristics
• inventory
• pull-to-center effect
• peer-chasing behaviour

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 http://img.apec-ecba.org/file/20170324/14051490338867855.pdf (Accessed on 13 Aug 2022); https://sdgs.un.org/partnerships/alibaba-digital-county-project (Accessed on 13 Aug 2022).

2 https://busycontinent.com/alibaba-cloud-unveils-new-centers/ (Accessed on 13 Aug 2022).

3 In most cases in practice, although decision makers observe the actions of their peers but do not have full information about the financial implications of these actions, they still can roughly know their peer’s outcomes, as long as the outcome is based on performance and the relationship between performance and outcome is common knowledge.

4 Experimental data can be accessed from https://github.com/njulug/data/raw/master/Online_experimental_data.rar.

Additional information

Funding

This work was supported by the [National Natural Science Foundation of China] under Grants [number 72171113] and [number 72071188].