Quick response under strategic consumers with high-price and stockout regrets

Abstract

This paper studies optimal pricing and inventory decisions of a perishable goods vendor in a traditional replenishment and quick-response system context—with the vendor offering strategic consumers who may exhibit regret behavior. Sometimes consumers may purchase goods without discounts (full-price) later experiencing high-price regret. Alternatively, consumers may face stockout regret when during goods price discount periods they face stockout. This study asks the question of whether and how firm price setting and inventory policy are affected by this dichotomy of regret and the quick-response cost with this regret behavior. The paper then identifies and compares the values of regret in the two systems and the values of quick response with and without regret. Findings show that stockout regret positively affects firm optimal pricing and profit in both systems. High-price regret has opposite effects. Additionally, regret in both systems have a positive value when stockout regret is significant and a negative value otherwise. When considering situations with and without regret, quick-response policy is consistently better than traditional replenishment policy. In a high quick-response cost situation, as the level of stockout (or high-price) regret increases (or decreases), the optimal firm policy transitions from traditional replenishment to quick-response policy. Finally, when stockout regret (or high-price regret) is significant, the value of regret in the quick-response system is higher than traditional replenishment system value of regret when quick-response cost is high (or low).