Impulse balance in the newsvendor game

One striking behavioral phenomenon is the “pull-to-center” bias in the newsvendor game: facing stochastic demand, subjects tend to order quantities between the expected profit maximizing quantity and mean demand. We show that the impulse balance equilibrium, which is based on a simple ex-post ration...

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Bibliographic Details
Published inGames and economic behavior Vol. 86; pp. 237 - 247
Main Authors Ockenfels, Axel, Selten, Reinhard
Format Journal Article
LanguageEnglish
Published Duluth Elsevier Inc 01.07.2014
Academic Press
Subjects
Behavioral operations management
Behavioral sciences
Demand curves
Economic behaviour
Economic cognition
Economic theory
Equilibrium
Ex-post rationality
Experiment
Game theory
Impulse balance equilibrium
Newsvendor game
Profit maximization
Rationality
Stochastic models
Studies
Ex-post rationality
D03
Experiment
Newsvendor game
Impulse balance equilibrium
Economic cognition
C91
D81
M11
Behavioral operations management
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Summary:One striking behavioral phenomenon is the “pull-to-center” bias in the newsvendor game: facing stochastic demand, subjects tend to order quantities between the expected profit maximizing quantity and mean demand. We show that the impulse balance equilibrium, which is based on a simple ex-post rationality principle along with an equilibrium condition, predicts the pull-to-center bias and other, more subtle observations in the laboratory newsvendor game. •We propose impulse balance equilibrium to organize behavior in the newsvendor game.•The model predicts the pull-to-center bias and other, more subtle observations.•We provide new laboratory evidence across a large range of parameters.
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ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2014.03.012