Is ignorance bliss? Centralized and competitive newsvendor models with product availability effect

This paper addresses newsvendor problem by endogenizing product availability effect on consumer demand. Specifically, we consider two retailers that sell a same product under a centralized or a decentralized market. The consumers are heterogeneous in their search costs, and make strategic choices based on the probability of product availability of different retailers. Building a game-theoretic model, we show that in addition to a symmetric Nash equilibrium, there may exist asymmetric equilibriums to the inventory competition game in the decentralized market. Nevertheless, the symmetric equilibrium is stable to maximize the total profit of two competing retailers. Then, we find that the retailers’ inventory decisions exhibit a “pull-to-center” bias when they ignore the product availability effect on consumer demand. In particular, for a small (large) product valuation, a retailer that ignores this effect will stock more (less) quantities and provide a higher (lower) fill rate than the benchmark optimum, thus pulling the inventory policy upward (downward). More interestingly, we show that such ignorance can be bliss in the decentralized market. Benefiting from the weakened competition, the retailers might perform better than the benchmark when they ignore the product availability effect. The welfare implications for both consumers and whole society are explored in the meantime. The findings also reveal some novel insights into the behavioral newsvendor research.