Markdown or Everyday Low Price? The Role of Behavioral Motives

Abstract

We study a seller's optimal pricing and inventory strategies when behavioral (non-pecuniary) motives affect consumers' purchase decisions. In particular, the seller chooses between two pricing strategies, markdown or everydaylow-price, and determines the optimal prices and inventory level at the beginning of a two-period selling season. Two salient behavioral motives that impact consumers' purchase decisions and the seller's optimal strategies are anticipated regret and misperception of product availability. Regret arises when a consumer initially chooses to wait but encounters stockout later, or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price. In addition, consumers often perceive the product's future availability to be different than its actual availability. We determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller. For example, ignoring these behavioral factors can result in up to 10% profit losses. We contrast the roles of consumers' strategic (pecuniary) motives with their behavioral (non-pecuniary) motives in affecting purchase, pricing, and inventory decisions. The presence of the behavioral motives reinstates the profitability of markdown over everyday-low-price, in sharp contrast to prior studies of only strategic motives which suggest the contrary. We characterize how and why strategic versus behavioral motives affect decisions in distinctive manners. In doing so, this paper also introduces and determines the behavioral benefits of pricing in leveraging consumers' behavioral regularities. We advocate that tactics which may intensify consumers' misperception of availability, such as intentionally disclosing low inventory levels, can have a far-reaching impact on improving the seller's profit.*

Behavioral Operations and Supply Chain Management–A Review and Literature Mapping

“…Studies in this group primarily investigate consumer and seller behavior under various pricing strategies (Ovchinnikov, ; Mak, Rapoport, Gisches, & Han, ; Li & Jain, ; Özer & Zheng, ; Kremer, Mantin, & Ovchinnikov, ; Qiu & Whinston, ). Another stream of research in this group studies capacity management issues and customer behavior in terms of capacity expectations (Liu & Ryzin, ), retention decisions (Ovchinnikov, Boulu‐Reshef, & Pfeifer, ), and change of buying behavior using different incentives (Liu & Ryzin, ).…”

Strategic Capacity Management When Customers Have Boundedly Rational Expectations

“…First, it allows us to isolate and focus on our research question on the firm's capacity decision, that is, whether capacity rationing is optimal or not. The same assumption is also made in van Ryzin (2008, 2011) and Ovchinnikov and Milner (2012). Second, it may be reasonable in many retail settings because of reputation considerations, price stickiness (Blinder et al 1998), etc. The market consists of a large population with a deterministic market size N. Each individual customer is assumed to be infinitesimally small so that strategic interactions among customers can be reasonably ignored.…”

Selling luxury fashion to conspicuous consumers in the presence of discount sensitivity behavior

“…They find that the discount rate is increasing with price and shelf space performance in the retail chain performance. Özer and Zheng () examine the effects of the regret behavior on two pricing strategies, markdown or everyday low price from an operational perspective. They consider that consumers may feel regret when they initially choose to wait but encounter stockout later or when they buy the product at the high price but realize that the product is still available at the markdown price.…”

“…With the possible stockout in luxury fashion, conspicuous consumers may purchase products at the full price rather than wait for the potential discount. However, with the possible future discount, conspicuous consumers may also feel regret to purchase at the full price if they find that the product is still available at the markdown price (Özer and Zheng, ). When making decisions on pricing and production, firms consider the discount sensitivity behavior (Belkaid and Martinez‐de‐Albeniz, ).…”