Decision Biases of Strategic Customers with Private Product‐Value Information: An Experimental Study

Abstract

We consider a random number of strategic customers who compete for a limited stock of products, and decide whether to buy a product at full price now or at a discount price by waiting until the end of the selling season. This decision is not trivial, as waiting leads to not only a lower cost, but also less value due to a possible stockout caused by the limited product quantity. The equilibrium analysis of the competition game based on a theoretical model predicts that strategic customers wait for the discount price when their private product valuations at the end of the selling season are above a threshold. We conduct a laboratory experiment to study strategic customers’ decisions and find that significantly fewer customers wait than predicted when the stock quantity is high, but not when the stock quantity is low. Our behavioral models with their structural estimates reveal that the strategic customers’ behavior is caused by decision biases of bounded rationality and risk aversion. These findings imply that a retailer should take account of decision biases when deciding on the optimal stock quantity because the decision biases of strategic customers benefit the retailer when stock quantity is high, but may not benefit them when stock quantity is low.