The Joint Decision of Cost Reduction Effort and Product Rollover Strategy for Fashion Items in the Presence of Strategic Consumers

Abstract

The trend in the fashion industry forces them to change their collection more frequently than ever. Product rollover strategy refers to the retailer’s decision how to manage the old product when the new one enters the market. They can either withdraw the old product to avoid cannibalization between two products (called a single rollover strategy) or sell both to maximize total sales (called a dual rollover strategy). This study considers a supplier who sells an innovative product through a retailer, which the latter subject to decides the rollover strategy. Through analytical approaches, we investigate the interaction between a supplier's cost-reduction and a retailer's rollover strategy when strategic consumers are present in the market. We found that the supplier's capability in R&D plays a crucial role in equilibrium results. When the firm is highly efficient in cost reduction, the introductory product price can be increased regardless of the rollover strategy being chosen. Our study demonstrates a counterintuitive result where a dual rollover strategy might have a lower introductory price compared to the single rollover strategy when the investment in production cost takes place. This finding shows how a supplier’s cost reduction effort mitigates the cannibalization effect while delivering a better profit.