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

• Author: Bin Shen,Jianheng Zhou,Xiaolei Xu
• DOI: http://doi.org/10.1111/itor.12543
• Date: 01 November 2018
• Published date: 01 November 2018

Intl. Trans. in Op. Res. 25 (2018) 1763–1784

DOI: 10.1111/itor.12543

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Selling luxury fashion to conspicuous consumers

in the presence of discount sensitivity behavior

Jianheng Zhou, Xiaolei Xu and Bin Shen,∗

Glorious Sun School of Business and Management, Donghua University, Shanghai 210005, China

E-mail: zjh001@dhu.edu.cn [Zhou]; xxl_870121@126.com [Xu]; binshen@dhu.edu.cn [Shen]

Received 11 July2017; received in revised form 22 March 2018; accepted 24 March 2018

Abstract

In the luxury fashion industry,with the possibility of stockout, conspicuous consumers may purchase products

at the full price rather than wait for any potential discount. However, in the presence of a possible future

discount, conspicuous consumers may also feel regret to purchase atthe full price if they find that the product

is still available at the markdown price. Considering the possible stockout and future discount, in this paper,

we evaluate the firm’s pricing and production decisions on conspicuous consumers in the presence of discount

sensitivity behavior. We build up an analytical model and consider that the customer purchasing utility

decreases with discount sensitivity if she/he purchases at the full price. The firm can create scarcity in the

market by reducing inventory to induce customers to purchase early. If the fraction of the customers with

discount sensitivity is lower than a certain level, the firm should intentionally produce a large amount of

products. Moreover, we find that product design enhancement can effectively weaken the negative effects of

customer discount sensitivity on the quantity decisions. More managerial insights are discussed.

Keywords:conspicuous consumption; discount sensitivity behavior; pricing; production; strategic consumer behavior

1. Introduction

Luxury fashion is an important industry in terms of its big sales volume and increasing population

of consumers (Boston Consulting Group, 2016; Shen et al., 2017a). Luxury fashion is mainly

consumed by conspicuous consumers who signal their uniqueness and exclusivity by purchasing

and using luxury fashion (Tereyagoglu and Veeraraghavan, 2012; Zheng et al., 2012; Mandler,

2017). Luxury fashion is quite expensive because of its high quality, and extra value in design and

branding (Shen et al., 2017b). To maintain brand image, some luxury fashion brands (e.g., LV and

Herm`

es) never offer price promotion as they consider that markdown activities may hurt their

brand image in the long term (Keller, 2009). However, some luxury fashion brands (e.g., Coach and

∗Corresponding author.

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1764 J. Zhou et al. / Intl. Trans. in Op. Res.25 (2018) 1763–1784

Michael Kors) provide discount annually as they consider markdown as an important strategy to

reduce inventory and maximize profit (Chiu et al., 2018). Lately, some luxury fashion brands have

started to offer sales promotion for various reasons. 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 productis still available atthe markdown price ( ¨

Ozer

and Zheng, 2016). When making decisions on pricing and production, firms consider the discount

sensitivity behavior (Belkaid and Martinez-de-Albeniz, 2017). If consumers have a higher degree

of discount sensitivity, they may have a lower utility in the full-price period, whereas if consumers

have a higher conspicuous level, they may have a lower utility in the markdown price period. In this

paper, we aim to evaluate the luxury fashion firm’s pricing and production decisions in the presence

of discount sensitivity behavior. The research questions are as follows.

RQ1: How does the discount sensitivity behavioraffect the firm’s production and pricing decisions?

RQ2: Can any business enhancement strategy mitigate the effects of discount sensitivity behavior

forafirm?

This paper studies the interaction between a firm’s production decision and scarcity strategy in

the presence of discount sensitivity behavior with conspicuous consumption. To the best of our

knowledge, it is the first paper to examine pricing and production policies considering consumer’s

discount sensitivity with conspicuous consumption. In this paper, we find the following three major

results. First, the firm can create scarcity in the market by reducing the inventory level so that

conspicuous consumers will purchase early. Second, if the fraction of the customers with discount

sensitivity is lower than a certain level, the firm would intentionally produce a large amount of

products.Third, product design enhancement can effectively reduce the effects of customer discount

sensitivity on the production decision.

The remainder of this paper is structured as follows.Section 2 reviews the major relevant literature.

Section 3 introduces the model and conducts the analysis in the homogeneous market. Section 4

explores the analysis in a heterogeneousmarket and evaluates the value of enhanced design. Section

5 concludes the paper and discusses future research. All of the technical proofs are relegated to the

Appendix.

2. Lit erature rev iew

This study is relevant to three streams of literature: (1) conspicuous consumption, (2) strategic

consumer behavior, and (3) discount sensitivity behavior.

The notion of purchasing goods to be conspicuous can date back to Veblen (1899) who, in The

Theory of the Leisure Class, explained how individuals show off their wealth or social status by

consuming luxury goods or services. Recently, conspicuous consumption has been widely investi-

gated from an operational perspective. Tereyagoglu and Veeraraghavan (2012) examine the impact

of scarcity on production and pricing decisions in the presence of conspicuous consumption for

luxury goods. They derivethe sufficient conditions under which scarcity strategies can be adopted to

improve profits successfully. They consider conspicuous consumer behavior based on the stockout

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2018 The Authors.

International Transactionsin Operational Research C

2018 International Federation of OperationalResearch Societies