Finance Papers

Document Type

Journal Article

Date of this Version

10-2012

Publication Source

Management Science

Volume

58

Issue

10

Start Page

1952

Last Page

1962

DOI

10.1287/mnsc.1120.1531

Abstract

We consider a supply chain with a single supplier and two retailers. The retailers choose their orders strategically, and if their orders exceed the supplier's capacity, quantities are allocated proportionally to the orders. We experimentally study the capacity allocation game using subjects motivated by financial incentives. We find that the Nash equilibrium, which assumes that players are perfectly rational, substantially exaggerates retailers' tendency to strategically order more than they need. We propose a model of bounded rationality based on the quantal response equilibrium, in which players are not perfect optimizers and they face uncertainty in their opponents' actions. We structurally estimate model parameters using the maximum-likelihood method. Our results confirm that retailers exhibit bounded rationality, become more rational through repeated game play, but may not converge to perfect rationality as assumed by the Nash equilibrium. Finally, we consider several alternative behavioral theories and show that they do not explain our experimental data as well as our bounded rationality model.

Copyright/Permission Statement

https://doi.org/10.1287/mnsc.1120.1531

Keywords

bounded rationality, capacity allocation, supply chain, quantal response equilibrium, Nash equilibrium

Embargo Date

10-2012

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Date Posted: 27 November 2017

This document has been peer reviewed.