Multi-Dimensional Decision Making in Operations: An Experimental Investigation of Joint Pricing and Quantity Decisions

An essential fact of decisions made under uncertainty, particularly in business contexts, is that multiple decisions often have to be made jointly. Firms in several industries like medicine, apparel and publishing must jointly determine the price and production quantity of their products well in advance of the selling season. The multiplicity of permutations in such settings is at once an opportunity and a challenge. Normative prescriptions to solve this problem have generally ignored behavioral aspects of decision-making, while behavioral research has paid limited attention to multi-dimensional decisions. In this study, we experimentally examine subjects' performance when they jointly determine price and quantities and find that subjects systematically deviate from the theoretically optimal price and quantity levels. When we decompose the decisions into price and quantity sequentially, we do not find improvement in subjects' decisions. However, when demand uncertainty is removed, or when information about market demand is provided after pricing decision is made, subjects improve their decisions.