Strategic Customer Behavior, Commitment, and Supply Chain Performance

Abstract

This paper studies the impact of strategic customer behavior on supply chain performance. We start with a newsvendor seller facing forward-looking customers. The seller initially charges a regular price but may salvage the leftover inventory at a lower salvage price after random demand is realized. Customers anticipate future sales and choose purchase timing to maximize their expected surplus. We characterize the rational expectations equilibrium, where we find that the seller's stocking level is lower than that in the classic model without strategic customers. We show that the seller's profit can be improved by promising either that quantities available will be limited (quantity commitment) or that prices will be kept high (price commitment). In most cases, both forms of commitment are not credible in a centralized supply chain with a single seller. However, decentralized supply chains can use contractual arrangements as indirect commitment devices to attain the desired outcomes with commitment. Decentralization has generally been associated with coordination problems, but we present the contrasting view that disparate interests within a supply chain can actually improve overall supply chain performance. In particular, with strategic customer behavior, we find that (i) a decentralized supply chain with a wholesale price contract may perform strictly better than a centralized supply chain; (ii) contracts widely studied in the supply chain coordination literature (e.g., markdown money, sales rebates, and buyback contracts) can serve as a commitment device as well as an incentive-coordinating device; and (iii) some of the above contracts cannot allocate profits arbitrarily between supply chain members because of strategic customer behavior. This paper studies the impact of strategic customer behavior on supply chain performance. We start with a newsvendor seller facing forward-looking customers. The seller initially charges a regular price but may salvage the leftover inventory at a lower salvage price after random demand is realized. Customers anticipate future sales and choose purchase timing to maximize their expected surplus. We characterize the rational expectations (RE) equilibrium, where we find that the seller's stocking level is lower than that in the classic model without strategic customers. We show that the seller's profit can be improved by promising that: either quantities available will be limited (quantity commitment) or prices will be kept high (price commitment).In most cases, both forms of commitment are not credible in a centralized supply chain with a single seller.However, decentralized supply chains can use contractual arrangements as indirect commitment devices to attain the desired outcomes with commitment. While decentralization has generally been associated with coordination problems, we present the contrasting view that disparate interests within a supply chain can actually improve overall supply chain performance. In particular, with strategic customer behavior, we find that: (...

Quick response and supply chain structure with strategic consumers

“…Strategic customer behavior, well studied in economics [17] and marketing [18][19][20], is introduced into a supply chain setting by Su and Zhang [14], where the impacts of strategic customer behavior on system performance under various contracts are analyzed. Khouja, Park, and Zhou [21] consider a newsvendor problem, in which patient consumers could get free gift cards offered by retailers at the end of the season if the consumers choose to delay their purchase.…”

“…Building upon the newsvendor model with strategic customers proposed in [14], our model considers four types of supply chains, namely: (1) decentralized supply chain without quick response, (2) decentralized supply chain with quick response, (3) centralized supply chain, and (4) centralized supply chain with quick response. In the absence of quick response, Su and Zhang [14] study the performance of supply chains taking into account strategic customers. They find that a decentralized supply chain could outperform a centralized supply chain under an appropriate wholesale price contract.…”

“…First, we show that with strategic consumers, the value of quick response is higher in centralized supply chains than in decentralized supply chains, if the unit cost of products with quick response is close to the unit cost of ordinary products. This is a counterintuitive finding, because according to [9] and [14], one would expect that quick response would generate more value for decentralized systems. Thus, if a firm could vertically integrate its supply chain and make the best of quick response, thereby effectively reducing the additional cost of quick response, it would make more profits from implementing quick response, compared to a decentralized system.…”

Price discount and capacity planning under demand postponement with opaque selling

“…Papers on this topic typically study the optimal pricing and capacity (inventory) allocation rules to maximize the revenue/profit of a seller. Su and Zhang [13] consider a newsvendor who sells products to strategic consumers in two periods. The seller can initially charge a regular price but will most likely salvage the leftover inventory at a lower salvage price after a random demand is realized.…”

What Is Interesting in Operations Management?

“…With this new perspective we learn that ignoring strategic behavior can lead a firm to carry too little inventory (Dana and Petruzzi 2001), or that optimal prices may rise over a selling season (Su 2007), or that committing to never mark down prices may help a firm (Su and Zhang 2008).…”