Behavioral Ordering, Competition and Profits: An Experimental Investigation

We investigate the impact of behavioral ordering on profits under competition. Specifically, we use controlled laboratory experiments to evaluate the differences in profits between a behavioral competitor (where a human places orders), and a management science-driven competitor (where orders are placed according to one of several plausible policies based on existing literature and managerial practice). Unlike the full-information game-theoretic models that assume rational decision-makers, these policies mimic practical situations by using less information and do not assume that their human competitors make fully rational decisions. Most prior literature focuses on non-competitive settings, where behaviorally biased deviations from optimal order quantities result in small expected profit losses. In contrast, under competition, we find that human decision-makers receive a substantially lower profit than the equilibrium expected profit, even as their competitors receive substantially higher profit.