Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers

Abstract

We consider a retailer that sells a product with uncertain demand over a finite selling season. The retailer sets an initial stocking quantity and, at some predetermined point in the season, optimally marks down remaining inventory. We modify this classic setting by introducing three types of consumers: myopic consumers, who always purchase at the initial full price; bargain-hunting consumers, who purchase only if the discounted price is sufficiently low; and strategic consumers, who strategically choose when to make their purchase. A strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price. In equilibrium, strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices, availability of inventory, and the behavior of other consumers. We find that the retailer stocks less, takes smaller price discounts, and earns lower profit if strategic consumers are present than if there are no strategic consumers. We find that a retailer should generally avoid committing to a price path over the season (assuming such commitment is feasible)--committing to a markdown price (or to not mark down at all) is often too costly (inventory may remain unsold) even in the presence of strategic consumers; the better approach is to be cautious with the initial quantity and then mark down optimally. Furthermore, we discuss the value of quick response (the ability to procure additional inventory after obtaining updated demand information, albeit at a higher unit cost than the initial order). We find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them: on average 67% more valuable and as much as 558% more valuable in our sample. In other words, although it is well established in the literature that quick response provides value by allowing better matching of supply with demand, it provides more value, often substantially more value, by allowing a retailer to control the negative consequences of strategic consumer behavior.strategic consumer behavior, quick response, dynamic pricing, game theory

Dynamic Pricing in the Presence of Social Learning and Strategic Consumers

“…For early work focusing on the implications of each of the two classes of policies, the reader is referred to Stokey (1979) and Landsberger and Meilijson (1985) for pre-announced pricing, and to Besanko and Winston (1990) for responsive pricing. Since then, both classes of policies have been used extensively to study various operational decisions; recent examples include Yin et al (2009), who assume a pre-announced price plan to study the effects of alternative inventory display formats on firm profit, and Cachon and Swinney (2009), who assume a responsive price plan to study the firm's quantity and salvage-pricing decisions. This paper is a first attempt towards understanding the relative effectiveness of pre-announced and responsive pricing when the firm and consumers face quality uncertainty and operate in the presence of SL.…”

“…However, when consumers are forward-looking, responsive pricing may also have adverse effects owing to the interplay between the product's price path and consumers' adoption decisions, as epitomized by the well-known Coase conjecture (Coase 1972). In fact, the general consensus in the literature is that a firm facing strategic consumers will prefer a pre-announced policy (see Cachon and Swinney (2009) for a notable exception). In a multi-period fixed-quantity setting, Dasu and Tong (2010) provide an upper bound for expected revenues under pre-announced and responsive pricing schemes, and observe that a pre-announced price plan with a small number of price changes performs nearly optimally.…”

“…3 The wealth-equivalent net benefit of purchasing the product for customer i in period t, t ∈ {1, 2}, is defined by u it = δ t−1 c (x i + q i − p t ), where p t is the price of the product in period t and δ c (0 ≤ δ c ≤ 1) is a discount factor that applies to second-period purchases and represents the opportunity cost of first-period product usage. Parameter δ c may also be interpreted as a measure of customers' patience and therefore as a measure of how "strategic" consumers are (Cachon and Swinney 2009). Throughout our analysis, we say that customers are "myopic" when δ c = 0, and "infinitely patient" when δ c = 1.…”

Selling to Conspicuous Consumers: Pricing, Production, and Sourcing Decisions

“…The operational impact of forward-looking or strategic customers has been considered in variety of contexts such as seasonal goods (Aviv and Pazgal 2008), commitment in supply chain performance (Su and Zhang 2008), triggering early purchases (Liu and van Ryzin 2008), price-match guarantees (Lai et al 2009), reservations (Ç il andLariviere 2009) and quick response strategy (Cachon and Swinney 2009). See Netessine and Tang (2009) and papers therein for an excellent overview of strategic consumer behavior literature.…”

Price Commitments with Strategic Consumers: Why It Can Be Optimal to Discount More Frequently … Than Optimal

“…Zhang 2008 andTereyagoglu andVeeraraghavan 2012 also adopt this allocation rule.) Alternatively, as in Cachon and Swinney (2009), high-type and bargain hunting consumers could form a queue in which every 1/ customer is a high type until there are no more high types, where ∈ 0 1 If = 1, high types are given full priority, which is the allocation rule we consider. As decreases, high types are more likely to be rationed.…”