Abundance Versus Scarcity: An Experimental Study of Financially Constrained Newsvendors

ABSTRACT This study experimentally investigates the ordering behavior of a financially constrained newsvendor‐like retailer facing stochastic demand under trade credit. Using controlled laboratory experiments, we examine the ordering behavior of a retailer procuring inventory on trade credit from the supplier under no‐bankruptcy risk (NBR) and bankruptcy risk (BR) at low‐ and high‐profit margins. Our experimental observations show deviations from normative optimality, and we find a contrast in the ordering behavior in NBR and BR settings. Compared to the respective normative optimal quantities, in the NBR setting, retailers overorder in the low‐profit margin and underorder in the high‐profit margin conditions, whereas, in the BR setting, consistent underordering is observed in both the low and high‐profit margin conditions. Next, we employ a dynamic panel regression model driven by the demand‐chasing heuristic to capture the ordering pattern. Finally, we develop a prospect theoretic model to describe the underordering behavior observed in the BR setting and find that the reference point plays a key role. Our results provide insights into the need to identify the behavior of financially constrained retailers and develop descriptive models for improved decision making.