Stocking Decisions for a Firm With the Presence of Prudent Consumers

Abstract

This paper examines the stocking quantity for a firm in the presence of prudent consumers. First, we analyze the conditions for prudent consumers to purchase products based on the estimations of perceived value bias and product availability, and then solve the firm's optimal stocking decisions. We observe that if the firm wants to determine an optimal stocking quantity to maximize the expected profit, it must search for more information about prudent consumers' perceived value bias, return cost, and estimates of product availability. We further compare prudent and myopic consumers and analyze how the firm's optimal stocking quantity would change when facing these two types of consumers. This result indicates the firm facing prudent consumers should take measures (such as increasing stocking quantity or providing relevant information) to increase the perception of product availability; however, when consumers in a market are myopic, the firm should properly increase the consumers' return cost by increasing compensation to the firm for returned products.