Revenue Management vs. Newsvendor Decisions: Does Behavioral Response Mirror Normative Equivalence?

Abstract

W e study and compare decision-making behavior under the newsvendor and the two-class revenue management models, in an experimental setting. We observe that, under both problems, decision makers deviate significantly from normative benchmarks. Furthermore, revenue management decisions are consistently higher compared to the newsvendor order quantities. In the face of increasing demand variability, revenue managers increase allocations; this behavior is consistent with normative patterns when the ratio of the selling prices of the two customer segments is less than 1/2, but is its exact opposite when this ratio is greater than 1/2. Newsvendors' behavior with respect to changing demand variability, on the other hand, is consistent with normative trends. We also observe that losses due to leftovers weigh more in newsvendor decisions compared to the revenue management model; we argue that overage cost is more salient in the newsvendor problem because it is perceived as a direct loss, and propose this as the driver of the differences in behavior observed under the two problems.

The Impact of Decision Types on Revenue Management Decisions: An Experimental Study

“…Similarly, the average booking limit decisions were significantly higher than the normative booking limit 60 under the B1high and B2high treatments, and significantly lower than the normative booking limit 100 under the B1low and B2low treatments ( p < .001 for both comparisons). The observed behavior with respect to normative benchmarks was consistent with previous findings in the behavioral operations management literature (see Kocabiyikoglu et al., ).…”

“…Our study contributes to the existing work in behavioral operations management literature which compares normatively equivalent but behaviorally different decision‐making settings (see e.g., Ho & Zhang, ; Katok & Wu, ; Wu & Chen, ; Kocabiyikoglu et al., ), by investigating the impact of decision type on allocation behavior under the same revenue management problem, with identical capacity, demand and price parameters. Moreover, our results, that compare actual and normative decisions, extend previous behavioral studies of revenue management models (Bearden et al., ; Kocabiyikoglu et al., ) and the newsvendor problems (e.g., Schweitzer & Cachon, ; Bolton & Katok, ; Bostian et al., ), by proposing the source of income, in particular, the different valuation of revenues from the high‐ and low‐end sales, as the driver of observed allocation patterns.…”

“…Our study contributes to the existing behavioral studies of revenue management models (see, e.g., Bearden, Murphy, & Rapaport, ; Bendoly, , ; Kocabiyikoglu, Gogus, & Gonul, ; reviewed in detail below) by investigating the impact of decision type on allocation decisions, under normatively equivalent settings. In particular, we study whether the number of units set aside for class 1 customers (or, equivalently, the number of units available for class 2 customers) differ when the decision makers set the protection level versus when they determine the booking limit, under the same revenue management problem with identical capacity, demand and price parameters.…”

“…Kocabiyikoglu et al. () compare decision behavior under the newsvendor and the two‐class revenue management models. They observe that, under mathematically equivalent settings, revenue management allocation decisions are consistently higher compared to newsvendor order quantities.…”

Behavioral Operations and Supply Chain Management–A Review and Literature Mapping

“…Other studies focus on optimizing the pricing and revenue generating strategies in different areas and industries such as airlines (Vulcano, Ryzin, & Chaar, ), arts (Tereyagoglu, Peter, & Senthil, ), and hospitality (Bendoly, ). Another research stream in this operations context re‐evaluates decision‐making errors and judgment biases in revenue management practices (Bearden, Murphy, & Rapoport, ; Bendoly, ; Kocabiyikoglu, Gogus, & Gonul, ). In a recent study, Hu and Nasiry () determine optimal pricing policy of a firm by showing market responsive to consumer behavior concerning gains or losses.…”