On the assessment of costs in a newsvendor environment: Insights from an experimental study

In this paper, we address the question of how the assessment of costs influences decisions in a newsvendor setting. We expect that different cost types lead to different behavior. In our investigation, we consider a newsvendor problem with opportunity costs and a newsvendor problem with penalty costs. In addition, we differentiate between three cases with different margins for each of the two problems. In an experimental study, we observe that the average order quantities in the newsvendor problem with penalty costs exceed the average order quantities in the newsvendor problem with opportunity costs and that a mean anchor effect, familiar from a number of previous studies, exists. A different weighting of costs can be seen as the main driver for the different order quantities. Thus, a biased perception of different cost types exists and decision makers are more sensitive to penalty costs than to opportunity costs. Based on our observations, we can identify situations where the cost weighting and the mean anchor effect compensate for each other and thus lead to “good” decisions as well as situations where the two effects compound and therefore lead to “bad” decisions. As penalty costs are present in many newsvendor situations, our insights allow us to apply the findings from behavioral studies of the newsvendor problem to a broader context.