Pricing and inventory strategies under quick response with strategic and myopic consumers

• Author: Peng Ma,Yulin Zhang,Xuantao Wang
• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/itor.12453
• Date: 01 May 2020

Intl. Trans. in Op. Res. 27 (2020) 1729–1750

DOI: 10.1111/itor.12453

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Pricing and inventory strategies under quick response

with strategic and myopic consumers

Xuantao Wanga, Peng Maband Yulin Zhangc

aDepartment of Business Administration, Guangdong University of Finance, Guangzhou 510521, P.R. China

bSchool of Economics and Management, Nanjing University of InformationScience and Technology, Nanjing 210044,

P.R. China

cSchool of Economics and Management, Southeast University, Nanjing 211189, P.R. China

E-mail: xuantaowang@126.com; mapeng88@126.com; zhangyl@seu.edu.cn

Received 18 January 2017; received in revised form 9 August 2017; accepted 14 August 2017

Abstract

We divide consumers in the selling period into two types according to their purchasing behavior: strategic

customers and myopic customers. We address the optimal inventory and pricing decision problemof a retailer

considering strategic and myopic consumers with and without a quick response. The results indicate that

the retailer should establish a higher price to sell only to myopic customers if there is a sufficient presence

of myopic customers in the market, and the retailer should set a lower price to sell to myopic and strategic

customers if the number of myopic customers in the market is relatively low. A quick response can decrease

the initial ordering quantity and increase the retailer’sprofit when selling only to myopic customers or selling

to both myopic and strategic customers. Moreover, a quick response is beneficial for the retailer t o improve

the product’s retail price if the retailer wishes the two types of customers to purchase the product during

the selling period. We also find that the pricing strategy considering strategic and myopic consumers under a

quick response will increase profits morethan the pricing strategy only considering myopic customers.Finally,

numerical experiments are conducted to illustrate and validate the proposed models and provide managerial

insights.

Keywords:strategic consumers; myopic consumers; quick response; pricing strategies

1. Introduction

As the price of a perishable product declines continuously over time, there is an opportunity to

obtain the same product at a lower price by waiting. The increasing use of the Internet provides

an opportunity for consumers to gather information about companies’ pricing policies and to

respond strategically. Some consumers may attempt to time their purchases to maximize their

own benefits. A major electronics retailer, Best Buy, has expressed strong opinions on this type

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International Transactionsin Operational Research C

2017 International Federation ofOperational Research Societies

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1730 X. Wang et al. / Intl. Trans. in Op. Res. 27 (2020) 1729–1750

of strategic customer behavior. In an article that appeared on the front page of the Wall Street

Journal, Best Buy Chief ExecutiveOfficer Brad Anderson openly labeled these customers as “devils”

(McWilliams, 2004). In recent years, increasing numbers of Chinese people are becoming strategic.

These consumers have started to study sellers’ promotions and wait to purchase new products at

the lowest price. For example, there is temporary silence in many malls during the period from

the Mid-Autumn Festival to National Day in China. The reason is that large malls may increase

their promotions on National Day. Thus, consumers often slow their consumption rate and adopt

a wait-and-see attitude toward the market. Another type of customer in the market is myopic.

Myopic consumers are the opposite of strategic consumers in that they purchase only during the

selling period. These consumers are unwilling to purchase during the salvage period either because

they are unwilling to return the product to the retailer during the salvage period or because they are

simply shortsighted. These customers who buy high-end gadgets without hesitationare described as

“angels” by Anderson (McWilliams, 2004). The two types of consumers often coexist in the market.

Strategic customers choose to buy a product early in the selling season or wait until the product

price may be marked downin the salvage season. They encounter a pricing risk because the product

may not be available at the end of the selling season. On the contrary, the myopic consumers

purchase only during the selling period. A quick response allows the retailer to exploit updated

information to better match supply with uncertain demand. The quick response capability allows

the retailer to make smaller inventoryinvestments to mitigate the consequences of leftover inventory

and replenish stock to lessen the opportunity cost of lost sales. However, it remains unclear how the

quick response capability impacts the retailer’s pricing and inventory strategies.

Our goal in this work is to study a retailer’s pricing and inventory decision problem with strategic

and myopic consumers. We address several questions: (a) How do strategic and myopic consumers

influence the retailer’s pricing and ordering strategy? (b) What is the value of quick response capa-

bilities with strategic and myopic consumers? (c) How does the quick response capability influence

the retailer’s pricing and ordering strategy in the presence of strategic and myopic consumers? (d)

Does the incremental value of the quick response become greater when considering strategic and

myopic consumers?

To answer these research questions, we analyze a monopolist firm’s pricing and production

quantity with uncertain demand. Consumers exhibit strategic and myopic purchasing behaviorwith

and without a quick response. We show that the retailer will decide to sell only to myopicconsumers

at a higher price when there are enough myopic consumers in the market. The retailer decides

to sell to both myopic and strategic consumers at a lower price when there are enough strategic

consumers in the market. We also show that a quick response is beneficial to firms, especially when

the market is dominated by strategic consumers. Moreover,a quick response decreases the expected

future utility of waiting for a price reduction. By decreasing strategic consumer incentives to wait

for clearance sales, a quick response allows firms to establish a higher selling price while inducing

strategic consumers to pay the full price.

The remainder of this paper is organized as follows. Section 2 reviews the literature. In Section 3,

the model descriptions are presented. Section 4 addresses the retailer’s optimal decision problem in

the basic model without a quick response. Section 5 presents the retailer’s optimal decision problem

in the quick response model. Section 6 validates the proposed theory using numerical examples.

Section 7 summarizes the paper.

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation ofOperational Research Societies