Newsvendor decisions under incomplete information: behavioural experiments on information uncertainty

Abstract

Accepted by: Aris SyntetosExploring the effects of information uncertainty presents an extensive challenge to decision makers. This study presents a set of behavioural experiments that examine the impact of incomplete information on newsvendor decisions. Findings show that orders deviate from normative benchmarks when decision makers have incomplete information and this tendency is stronger when the demand distribution is not known. Comparison of decisions under incomplete information against behavioural benchmarks with full and no information reveal that the availability of price and cost information brings decisions significantly closer to normative levels when the underlying demand distribution is unknown. On the opposite spectrum, when demand information is available, not knowing price or cost does not lead to worse decisions. Analysing newsvendor profits under various information conditions, we find participants capture at most 84% of earnings they could have generated if they ordered the normative quantity in high-profit margin settings; the corresponding percentage is 51% in low-profit margin settings. Our results suggest decreasing uncertainty on the demand distribution has a consistently positive impact on profits, while uncertainty about cost or price does not have a significant effect. Implications of our findings on the differential impact of incomplete information are discussed via the backdrop of the prevalence of newsvendor framework across a wide range of operational decisions.