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Decision Bias in Capacity Allocation Games with Uncertain Demand
Author(s) -
Chen Yefen,
Zhao Xiaobo
Publication year - 2015
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12257
Subject(s) - economic shortage , nash equilibrium , microeconomics , game theory , supply chain , economics , computer science , operations research , business , marketing , linguistics , philosophy , government (linguistics) , engineering
Existing studies on capacity allocation games have demonstrated that the standard Nash theory exaggerates retailers' tendency of ordering more than they need in the situation of supply shortage. Adding to the results in the literature, our experimental study with consideration of demand uncertainty demonstrates that the standard Nash theory also exaggerates retailers' tendency of telling the truth in their ordering strategy. To account for these systematic biases, based on the quantal response equilibrium framework, we develop a behavioral model with different mental weights on the underage and overage costs to characterize a retailer's perception bias regarding a critical fractile. Based on the parameter estimates, we show that retailers perceive the critical fractile as being closer to 0.5 than it is, and the perceived critical fractile increases over time. Such empirical evidence of retailers' behavior in capacity allocation games can be valuable, for example, in the mechanism design of coordination and in improving supply chain performance.