Does overconfident effect affect the performance of a duopoly market? A theoretical analysis

Abstract

This paper investigates the impact of the retailer's overconfident preference on the supply chain performance under demand uncertainty in a duopoly market. We consider a two-echelon supply chain composed of one rational manufacturer, one rational retailer and one overconfident retailer. In the duopoly market, the demand is affected by retailers' selling prices and other random factors. According to the overconfident retailer's overconfident information characteristic and game mode, we study two cases: (1) the rational retailer knows that the other retailer has overconfident preference; (2) the rational retailer doesn't know that the other retailer has overconfident preference. We build a mathematical model and conduct numerical method to analyze the effect of overconfident level on the optimal pricing and order decisions and the expected profits. We find that the higher the overconfident level is, the higher the selling price the overconfident retailer charges and this results in larger profit loss.