Strategic Management of Distressed Inventory

Abstract

It is well known that maximizing revenue from a fixed stock of perishable goods may require discounting prices rather than allowing unsold inventory to perish. This behavior is seen in industries ranging from fashion retail to tour packages and baked goods. A number of authors have addressed the markdown management problem in which a seller seeks to determine the optimal sequence of discounts to maximize the revenue from a fixed stock of perishable goods. However, merchants who consistently use markdown policies risk training customers to “wait for the sale.” We investigate models in which the decision to sell inventory at a discount will change the future expectations of customers and hence their buying behavior. We show that, in equilibrium, a single‐price policy is optimal if all consumers are strategic and demand is known to the seller. Relaxing any of these conditions can lead to a situation in which a two‐price markdown policy is optimal. We show using numerical simulation that if customers update their expectations of availability over time, then optimal sales limit policies can evolve in a complex fashion.

Optimal online markdown and markup pricing policies with demand uncertainty

“…Thus, the retailer has to decide when to adjust price based on the quantity sold out at prior price and how much to change the price facing the online information of demand. In practice, if the times of price changing are limited to no more than k (more times more adjusting cost), the retailer has to answer the two questions before the end of sale season: (1) what the ith price should be, and (2) when to change the (i − 1)th price to the ith price?…”

“…To optimize revenue, the retailer is better off (at least in the short run) discounting the stock than allowing it to perish. As a result, many sellers of perishable goods use a markdown pricing policy whereby an item is initially sold at full price and then subjected to deeper and deeper discounts until inventory is completely sold or the sale season ends, whichever comes first [1]. This dynamic pricing policy is commonly used by many vendors of seasonal, fashion, and perishable goods (see [2,3] and references therein).…”

Markdown or Everyday Low Price? The Role of Behavioral Motives

“…The majority of these studies focus on pricing decisions with a fixed inventory (e.g., Su 2007, Elmaghraby et al 2008. A consensus in this literature is that the presence of strategic consumers hurts the profitability of dynamic pricing practices (e.g., Besanko and Winston 1990, Nair 2007, Aviv and Pazgal 2008, Levin et al 2009 and often leads to the optimality of a single-price policy (e.g., Coase 1972, Stokey 1979, Wilson 1988, Su 2007, Gallego et al 2008. A few recent studies discuss several operational reasons (e.g., uncertain valuation, product variety, and cost of visiting a retailer) that may retain the benefit of dynamic pricing with strategic consumers (e.g., Swinney 2011, Parlakturk 2012, Cachon and Feldman 2013.…”

“…A few recent studies discuss several operational reasons (e.g., uncertain valuation, product variety, and cost of visiting a retailer) that may retain the benefit of dynamic pricing with strategic consumers (e.g., Swinney 2011, Parlakturk 2012, Cachon and Feldman 2013. Some studies introduce an inventory focus, with either fixed or endogenous prices (e.g., Gallego et al 2008, Liu and van Ryzin 2008, 2011, Zhang and Cooper 2008, Cachon and Swinney 2009). Our paper is most relevant to Gallego et al (2008) and van Ryzin (2008, 2011).…”

“…Some studies introduce an inventory focus, with either fixed or endogenous prices (e.g., Gallego et al 2008, Liu and van Ryzin 2008, 2011, Zhang and Cooper 2008, Cachon and Swinney 2009). Our paper is most relevant to Gallego et al (2008) and van Ryzin (2008, 2011). They investigate settings of markdown management and show that when consumers are strategic, it is beneficial for the seller to withhold the amount of inventory put up for sale at the markdown period (i.e., adopting inventory rationing).…”