Markdown Pricing with Unknown Fraction of Strategic Customers

Adam J. Mersereau · Dan Zhang

110 citations0/0 files storedManufacturing & Service Operations Management

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Supply Chain and Inventory Management Consumer Market Behavior and Pricing Advanced Queuing Theory Analysis

Abstract

A growing segment of the revenue management and pricing literature assumes “strategic” customers who are forward-looking in their pursuit of utility. Recognizing that such behavior may not be directly observable by a seller, we examine the implications of seller uncertainty over strategic customer behavior in a markdown pricing setting. We assume that some proportion of customers purchase impulsively in the first period if the price is below their willingness to pay, while other customers strategically wait for lower prices in the second period. We consider a two-period selling season in which the seller knows the aggregate demand curve but not the proportion of customers behaving strategically. We show that a robust pricing policy that requires no knowledge of the extent of strategic behavior performs remarkably well. We extend our model to a setting with stochastic demand, and show that the robust pricing policy continues to perform well, particularly as capacity is loosened or the problem is scaled up. Our results underscore the need to recognize strategic behavior, but also suggest that in many cases effective performance is possible without precise knowledge of strategic behavior.

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References

2004The Theory and Practice of Revenue Management 1994Optimal Dynamic Pricing of Inventories with Stochastic Demand over Finite Horizons 2003Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions 2003An Overview of Pricing Models for Revenue Management 2008Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers 2007Intertemporal Pricing with Strategic Customer Behavior 2008Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers 2005Pricing and Revenue Optimization

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2015The Reference Effects on a Retailer’s Dynamic Pricing and Inventory Strategies with Strategic Consumers 2016Intertemporal Pricing Under Minimax Regret 2016Dynamic Pricing in the Presence of Myopic and Strategic Consumers: Theory and Experiment 2017Recent Research Developments of Strategic Consumer Behavior in Operations Management 2013Dynamic pricing with strategic customers

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