Optimal order quantity in the presence of strategic customers

Abstract

We consider a monopolistic retailer of a seasonal product who faces random demand of strategic customers. The selling season is segmented into two periods, a normal selling period and a sales or discounted price period. The retailer preannounces the total sales quantity and the prices offered in these periods. Customers have identical product valuation in the normal selling period. However, a customer’s valuation of the product in the sales period is his private information and is assumed to be randomly distributed. A strategic customer decides to either buy in the normal selling period or wait for the sales period by comparing his expected utility in the respective periods. In a market of such strategic customers, a retailer faces the problem of determining his optimal order quantity. Hence, in this research we consider a two-stage decision making process; in the first stage, the retailer decides the initial order quantity and in the second stage strategic customers decide to either buy during the normal selling period or wait for the sales period. The focus of this work is to determine the order quantity of the retailer which maximizes his expected profit in a monopoly market of such decision making strategic customers. We determine the optimal order quantity of the retailer given these optimal decisions of strategic customers by extending the work of Song et al. (Prod Oper Manag 28(5):1305–1319, 2019). Numerical illustrations and parametric analysis are performed to get insights about the developed model.