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Inventory Decisions in the Presence of Strategic Customers: Theory and Behavioral Evidence

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  • Yang Zhang
  • Benny Mantin
  • Yaozhong Wu

Abstract

We consider the inventory decision of a retailer facing strategic customers. We develop a behavioral theory that accounts for reference dependence, which makes predictions on how the presence of strategic customers leverages retailer behavior. Specifically, the reference‐dependent retailer shall decrease her order quantity when there are more strategic customers in the population. As such, the conventional pull‐to‐center bias for newsvendor is generalized, since the presence of strategic customers may induce the retailer to pull her order further below the center even when the production cost is low. Furthermore, increasing proportion of strategic customers reduces the retailer's ordering bias under low cost, yet amplifies it when the cost is high. Our subsequent experiments find pull‐below‐center effect, validate the theoretical predictions, and establish the asymmetry of reference dependence with the estimated behavioral parameters. We also study extensions to our model and carry out robustness checks of our experimental results.

Suggested Citation

  • Yang Zhang & Benny Mantin & Yaozhong Wu, 2019. "Inventory Decisions in the Presence of Strategic Customers: Theory and Behavioral Evidence," Production and Operations Management, Production and Operations Management Society, vol. 28(2), pages 374-392, February.
    • Handle: RePEc:bla:popmgt:v:28:y:2019:i:2:p:374-392
    DOI: 10.1111/poms.12926
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    Cited by:

    1. Ying‐Ju Chen & Leon Yang Chu, 2020. "Synchronizing pricing and replenishment to serve forward‐looking customers," Naval Research Logistics (NRL), John Wiley & Sons, vol. 67(5), pages 321-333, August.
    2. Peter Seele & Claus Dierksmeier & Reto Hofstetter & Mario D. Schultz, 2021. "Mapping the Ethicality of Algorithmic Pricing: A Review of Dynamic and Personalized Pricing," Journal of Business Ethics, Springer, vol. 170(4), pages 697-719, May.
    3. Chen, Junlin & Zhao, Yingshuai, 2020. "High price or low price? An experimental study on a markdown pricing policy," European Journal of Operational Research, Elsevier, vol. 284(1), pages 240-254.
    4. Rajesh Bagchi & Sung H. Ham & Chuan He, 2020. "Strategic Implications of Confirmation Bias‐Inducing Advertising," Production and Operations Management, Production and Operations Management Society, vol. 29(6), pages 1573-1596, June.
    5. Narayan Mishra & Sri Vanamalla Venkataraman, 2022. "Optimal order quantity in the presence of strategic customers," Annals of Operations Research, Springer, vol. 315(2), pages 1871-1894, August.
    6. Jammernegg, Werner & Kischka, Peter & Silbermayr, Lena, 2022. "Heterogeneity, asymmetry and applicability of behavioral newsvendor models," European Journal of Operational Research, Elsevier, vol. 301(2), pages 638-646.

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