Newsvendor competition under asymmetric cost information

We study the newsboy duopoly problem under asymmetric cost information. We extend the Lippman and McCardle (1997) of competitive newsboy to the case where the two firms are privately informed about their unit costs. The market demand is initially split between two firms and the excess demand for each firm is reallocated to the rival firm. We show the existence and uniqueness of a pure strategy equilibrium and characterize its structure. The equilibrium conditions have an interesting recursive structure that enables an easy computation of the equilibrium order quantities. Presence of strategic interactions creates incentives to increase order quantities for all firm types except the type that has the highest possible unit cost. Consequently, competition leads to higher total inventory in the industry. However, contrary to intuition, this is only true when the firms are non-identical. A firm’s equilibrium order quantity increases with a stochastic increase in the total industry demand or with an increase in his initial allocation of the total industry demand. We demonstrate our model and results in an application in a dual-sourcing procurement setting using data that obtained from a large manufacturing company. Finally, we provide a full characterization of the equilibrium of the game for the special case of uniform demand and linear market shares.