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Do Random Errors Explain Newsvendor Behavior?

Author

Listed:
  • Mirko Kremer

    (Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

  • Stefan Minner

    (Faculty of Business, Economics and Statistics, University of Vienna, 1210 Vienna, Austria)

  • Luk N. Van Wassenhove

    (Technology and Operations Management, INSEAD, 77305 Fontainebleau Cedex, France)

Abstract

Previous experimental work showed that newsvendors tend to order closer to mean demand than prescribed by the normative critical fractile solution. A recently proposed explanation for this mean ordering behavior assumes that the decision maker commits random choice errors, and predicts the mean ordering pattern because there is more room to err toward mean demand than away from it. Do newsvendors exhibit mean ordering simply because they make random errors? We subject this hypothesis to an empirical test that rests on the fact that the random error explanation is insensitive to context. Our results strongly support the existence of context-sensitive decision strategies that rely directly on (biased) order-to-demand mappings, such as mean demand anchoring, demand chasing, and inventory error minimization.

Suggested Citation

  • Mirko Kremer & Stefan Minner & Luk N. Van Wassenhove, 2010. "Do Random Errors Explain Newsvendor Behavior?," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 673-681, July.
  • Handle: RePEc:inm:ormsom:v:12:y:2010:i:4:p:673-681
    DOI: 10.1287/msom.1100.0294
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    References listed on IDEAS

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