Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 31203
The Competitive Newsvendor Game with Overestimated Demand

Authors: Chengli Liu, C. K. M. Lee


The tradition competitive newsvendor game assumes decision makers are rational. However, there are behavioral biases when people make decisions, such as loss aversion, mental accounting and overconfidence. Overestimation of a subject’s own performance is one type of overconfidence. The objective of this research is to analyze the impact of the overestimated demand in the newsvendor competitive game with two players. This study builds a competitive newsvendor game model where newsvendors have private information of their demands, which is overestimated. At the same time, demands of each newsvendor forecasted by a third party institution are available. This research shows that the overestimation leads to demand steal effect, which reduces the competitor’s order quantity. However, the overall supply of the product increases due to overestimation. This study illustrates the boundary condition for the overestimated newsvendor to have the equilibrium order drop due to the demand steal effect from the other newsvendor. A newsvendor who has higher critical fractile will see its equilibrium order decrease with the drop of estimation level from the other newsvendor.

Keywords: Nash Equilibrium, bias, overestimation, competitive newsvendor

Digital Object Identifier (DOI):

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1205


[1] K. J. Arrow, T. Harris, and J. Marschak, "Optimal inventory policy," Econometrica: Journal of the Econometric Society, pp. 250-272, 1951.
[2] G. Gallego and I. Moon, "The Distribution Free Newsboy Problem: Review and Extensions," The Journal of the Operational Research Society, vol. 44, pp. 825-834, 1993.
[3] M. Parlar, "Game theoretic analysis of the substitutable product inventory problem with random demands," Naval Research Logistics (NRL), vol. 35, pp. 397-409, 1988.
[4] S. A. Lippman and K. F. McCardle, "The competitive newsboy," Operations research, vol. 45, pp. 54-65, 1997.
[5] D. Kahneman and A. Tversky, "Prospect theory: An analysis of decision under risk," Econometrica: Journal of the Econometric Society, pp. 263-291, 1979.
[6] C. X. Wang and S. Webster, "The loss-averse newsvendor problem," Omega, vol. 37, pp. 93-105, 2009.
[7] C. X. Wang, "The loss-averse newsvendor game," International Journal of Production Economics, vol. 124, pp. 448-452, 2010.
[8] G. L. Urban, B. D. Weinberg, and J. R. Hauser, "Premarket forecasting of really-new products," The Journal of Marketing, pp. 47-60, 1996.
[9] M. Paich and J. D. Sterman, "Boom, bust, and failures to learn in experimental markets," Management Science, vol. 39, pp. 1439-1458, 1993.
[10] Y. Huang, P. Vir Singh, and K. Srinivasan, "Crowdsourcing new product ideas under consumer learning," Management Science, vol. 60, pp. 2138-2159, 2014.
[11] F. Y. Edgeworth, "The mathematical theory of banking," Journal of the Royal Statistical Society, vol. 51, pp. 113-127, 1888.