Transshipment Between Overconfident Newsvendors

Abstract

This study investigates the impacts of transshipment between overconfident newsvendors who perceive the expected outcome of a random event as more certain than it actually is. The conventional wisdom is that transshipment is a risk-pooling strategy for improving newsvendors’ performance. However, we find that overconfident newsvendors can be worse off with transshipment as compared to without transshipment. This result remains when overconfident newsvendors possess other behaviors such as fairness, demand- and supply-side thinking, loss aversion, and demand anchoring. We also utilize data from controlled experiments to demonstrate that overconfidence is a robust behavior with transshipment.