Suppliers and retailers in the newsvendor setting need to submit their pricing and inventory decisions respectively, well before actual customer demand is realized. In the literature they have both been typically considered as perfectly rational optimizers, exclusively interested in their own respective benefits. Under the above set of conditions the wholesale price-only contract has long been analytically proven as inefficient. We asked real human subjects to act as suppliers or retailers in simulation games performed in the laboratory. We found their decisions to significantly deviate from the perfectly rational decisions. By using Agent Based Simulation as the evaluation tool, we investigated the effect of their varying individual preferences on the contract’s efficiency. In doing so we established sufficient evidence that the contract can emerge as efficient, in spite of the underlying strategies’ under-performances. This counter-intuitive result fully supports the contract’s long observed wide popularity.
Figure 2: The Decentralized Newsvendor Problem