A Newsvendor Contest (Guidelines for a CEO)

Abstract

This study investigates the Newsvendor Contest: two newsvendors not only earn profits but also compete for a fixed bonus awarded to one of them whose realized profit is higher than that of the other contender. We analyze both the simultaneous-move game, which is relevant to such business scenarios as employees competing for promotion, and the sequential-move contest, which is relevant to situations such as sharing of the best practices within a company, and even to a problem of a CEO "competing" against the past performance of their own company. We find that despite apparent simplicity this model can explain a rich range of behaviors, from imitation to differentiation, reflecting a non-obvious interaction of the demand correlation structure and the bonus size. Although our model builds on the classical models of rent-seeking, social comparison, and capacity management under uncertainty, our results are qualitatively different, and, we hope, may be of interest to both academics and practitioners.

Keywords: newsvendor contest, rent-seeking, yardstick competition, other-regarding preferences

JEL Classification: C72, D41, J31, M12, M52