The Ignorant Newsvendor's Problem : Firms Adapting to Variable and Uncertain Demand

How much do informational constraints impact economic outcomes? This paper applies a computational modeling strategy to inventory purchasing decisions. Known as the “newsvendor problem”, statistics theory has found optimal heuristics for firm behavior in conditions of unpredictable consumer demand. The contribution here is to explore a worst-case scenario for informational constraints, where the firm both does not know the underlying distribution and lacks cognitive capacity to estimate it in a sophisticated fashion. Employing a crude heuristic device, I find that the difference between an optimal full-information outcome and the no-information case is qualitatively small. While information problems are still worthy of study, I conclude that their overall impact on the positive functioning of markets is not very large