Inventory and pricing decisions when dealing with strategic consumers: A comprehensive analysis

Abstract

This work focuses on firms that sell perishable products to risk-averse strategic consumers over two periods: the full-price period and the clearance period. The risk-aversion level of strategic consumers affects their expected utility in both periods, which will determine their purchasing behaviour. Typically, firms implement either quantity commitment (QC), price commitment (PC) or rational-expectation equilibrium (REE) policies to plan for risk-averse strategic consumers’ purchasing behaviour. In this study, we develop and analyze a novel model on the sales policy, full price, and the initial inventory decisions in the above setting. Results show that the risk-aversion level of strategic consumers has structural implications on optimal policies. First, firms should implement QC when the risk-aversion level is higher than a critical threshold; otherwise, PC is better. Second, the critical threshold of risk aversion increases as the unit cost of a product and clearance price decrease and as the consumer valuation increases. This can affect the optimal policy (QC, PC or REE). Finally, PC is always optimal when strategic consumers are risk seeking. We also conclude that the optimal policy is significantly affected by the proportion of strategic consumers when we consider different kinds of consumers (e.g. myopic consumers).