How to Account for Behavioral Newsvendors: The Robust Buyback Contract to Address Response Uncertainty.

Zoom Research Seminar / 5th floor, lecture 2

26 February 2025
10:0011:00 

English
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Dr. Michael Becker-Peth

Associate Professor of Operations and Supply Chain Management

Rotterdam School of Management, Erasmus University Rotterdam

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Abstract

The normative (expected profit-maximizing) theory assumes that decision-makers are fully rational, but in reality, they deviate from the optimal response. In contract negotiations, contract parameters are often optimized based on the assumption of rational behavior. Deviations from rational behavior can lead to significant costs for all parties involved. To address this, we propose robust optimization to obtain contract parameters that are robust to deviations from rational behavior.

We apply this optimization approach to obtain the robustly optimal contract parameters for the buyback contract when there is limited knowledge of the buyers' responses. 

We compare the robust contract to the normative contract if people behave according to known behavioral models, such as mean-anchoring, bounded rationality, or a behavioral model explicitly for the buyback contract. Additionally, we test different robust contracts in a lab experiment with actual human decision-makers. The results demonstrate that a robust contract, based on simple assumptions, can outperform the normative contract in terms of risk while not sacrificing average supply chain profit. This approach offers a practical way to set contract parameters without relying on assumptions about the distribution of responses, except for the support.

Bio

Michael Becker-Peth is an Associate Professor of Operations and Supply Chain Management at the Rotterdam School of Management, Erasmus University. His research focuses on behavioral operations management, for example in the field of inventory management and supply chain contracting. His research has been published in leading academic journals such as Management Science, Production and Operations Management, and European Journal of Operational Research. Before joining, RSM, he worked as an assistant professor at the University of Cologne. He obtained his PhD (in Supply Chain Management) and MSc (in Business Administration) also from the University of Cologne.

Organizer

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Ekaterina Neigum

Team Assistant (Resident Faculty)