Multidimensional Decision Making in Operations: An Experimental Investigation of Joint Pricing and Quantity Decisions

Firms in several industries, such as medicine, apparel, and publishing, must jointly determine the price and production quantity of their products well in advance of the selling season. Normative prescriptions to solve this problem have generally ignored behavioral aspects of decision making while behavioral research has paid limited attention to interdependent, multidimensional decisions. We experimentally examine subjects’ performance when they jointly determine price and quantities. We find that subjects systematically deviate from the theoretically optimal price and quantity levels. Contrary to expectation, decomposing the price and quantity decisions does not improve subjects’ decisions. In a series of follow-up experiments, we isolate the effects of (a) interdependence between decisions and (b) demand uncertainty. We show that decisions improve by making subjects more aware of interdependence and by reducing the uncertainty. However, reducing complexity through partial automation of the interdependent dimensions does not improve the decisions made by subjects. We also find that subjects anchor on cost for price decisions and on mean demand potential for quantity decisions, thereby explaining the consistent underpricing and overordering behavior across experiments.

This paper was accepted by Vishal Gaur, operations management.