Product substitution with customer segmentation under panic buying behavior

Abstract

Under conditions of consumer panic buying, satisfying demand with the available products is a complex problem. In reality, most retailers accept alternative products during panic situations. This study considers the case of firm-driven substitution of products (differing in weight) based on retailer preferences over two periods. In the proposed model, panic behavior emerged in the first period and supply disruption occurred in the second period. Under this model, retail stores were segmented into high index (valuable) and low index (less valuable) customers. Before meeting the demand of low-index customers, wholesalers attempt to satiate high-index customer’s panic buying behavior. We determined the optimal number of units to be substituted, order quantities, and leftover units that generated maximum total profits for the wholesaler. The performance of the model was analyzed both with and without customer-segmented substitution. To gain managerial insights, we also examined the influence of both the degree of supply disruption and substitution costs on decisions and profits. The results can assist business managers to improve the decision-making process.