Simple models of discrete choice and their performance in bandit experiments

Simple models of discrete choice and their performance in bandit experiments

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Article ID: iaor200937831
Country: United States
Volume: 9
Issue: 4
Start Page Number: 383
End Page Number: 408
Publication Date: Sep 2007
Journal: Manufacturing & Service Operations Management
Authors: , ,
Keywords: behaviour
Abstract:

Recent operations management papers model customers as solving multiarmed bandit problems, positing that consumers use a particular heuristic when choosing among suppliers. These papers then analyze the resulting competition among suppliers and mathematically characterize the equilibrium actions. There remains a question, however, as to whether the original customer models on which the analyses are built are reasonable representations of actual consumer choice. In this paper, we empirically investigate how well these choice rules match actual performance as people solve two–armed Bernoulli bandit problems. We find that some of the most analytically tractable models perform best in tests of model fit. We also find that the expected number of consecutive trials of a given supplier is increasing in its expected quality level, with increasing differences, a result consistent with the models' predictions as well as with loyalty effects described in the popular management literature.

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