Markdown Pricing Research Articles

Dynamic Pricing and Inventory Management with Regular and Expedited Supplies

We consider a periodic‐review inventory system with regular and expedited supply modes. The expedited supply is faster than the regular supply but incurs a higher cost. Demand for the product in each period is random and sensitive to its selling price. The firm determines its order quantity from each supply in each period as well as its selling price to maximize the expected total discounted profit over a finite or an infinite planning horizon. We show that, in each period if it is optimal to order from both supplies, the optimal inventory policy is determined by two state‐independent thresholds, one for each supply mode, and a list price is set for the product; if only the regular supply is used, the optimal policy is a state‐dependent base‐stock policy, that is, the optimal base‐stock level depends on the starting inventory level, and the optimal selling price is a markdown price that decreases with the starting inventory level. We further study the operational impact of such supply diversification and show that it increases the firm's expected profit, reduces the optimal safety‐stock levels, and lowers the optimal selling price. Thus that diversification is beneficial to both the firm and its customers. Building upon these results, we conduct a numerical study to assess and compare the respective benefit of dynamic pricing and supply diversification.

The Promise of Strategic Customer Behavior: On the Value of Click Tracking

Click tracking is gaining in popularity, and the practice of web analytics is growing fast. Whether strategic customers are willing to visit a website when they know their clicks may be tracked is an important yet complex problem, which depends on various factors. Using a newsvendor framework, we examine this problem by focusing on the operational factor: how product availability induces strategic customers to voluntarily provide advance demand information. We find that a strong Nash equilibrium exists where every customer is willing to click, and customer incentives to click are robust to noise. Hence, we demonstrate the promise of strategic customer behavior in the context of click tracking, contrary to the conventional wisdom that it is typically a peril for the firm. Notably, click tracking is typically advantageous to both the firm and its customers, compared with other strategies such as advance selling, quantity commitment, availability guarantees, and quick response. Lastly, we extend to two settings by including marketing decisions, price‐sensitive demand and markdown pricing, and discuss how operations and marketing decisions interact in influencing the value of click tracking.

Markdown or Everyday Low Price? The Role of Behavioral Motives

We study a seller’s optimal pricing and inventory strategies when behavioral (nonpecuniary) motives affect consumers’ purchase decisions. In particular, the seller chooses between two pricing strategies, markdown or everyday low price, and determines the optimal prices and inventory level. Two salient behavioral motives that impact consumers’ purchase decisions and the seller’s optimal strategies are anticipated regret and misperception of product availability. Regret arises when a consumer initially chooses to wait but encounters stockout later, or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price. In addition, consumers often perceive the product’s future availability to be different than its actual availability. We determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller. For example, ignoring these behavioral factors can result in up to 10% profit losses. We contrast the roles of consumers’ strategic (pecuniary) motives with their behavioral (nonpecuniary) motives in affecting purchase, pricing, and inventory decisions. The presence of the behavioral motives reinstates the profitability of markdown over everyday low price, in sharp contrast to prior studies of only strategic motives that suggest the contrary. We characterize how and why strategic versus behavioral motives affect decisions in distinctive manners. In doing so, this paper also introduces and determines the behavioral benefits of pricing in leveraging consumers’ behavioral regularities. We advocate that tactics that may intensify consumers’ misperception of availability, such as disclosing low inventory levels, can have a far-reaching impact on improving the seller’s profit. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2147 . This paper was accepted by Yossi Aviv, operations management.

Markdown or Everyday-Low-Price? The Role of Consumer Regret and Availability Misperception

We study a seller's optimal pricing and inventory strategies when behavioral (non-pecuniary) motives affect consumers' purchase decisions. In particular, the seller chooses between two pricing strategies, markdown or everyday-low-price, and determines the optimal prices and inventory level at the beginning of a two-period selling season. Two salient behavioral motives that impact consumers' purchase decisions and the seller's optimal strategies are anticipated regret and misperception of product availability. Regret arises when a consumer initially chooses to wait but encounters stockout later, or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price. In addition, consumers often perceive the product's future availability to be different than its actual availability. We determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller. For example, ignoring these behavioral factors can result in up to 10% profit losses. We contrast the roles of consumers' strategic (pecuniary) motives with their behavioral (non-pecuniary) motives in affecting purchase, pricing, and inventory decisions. The presence of the behavioral motives reinstates the profitability of markdown over everyday-low-price, in sharp contrast to prior studies of only strategic motives which suggest the contrary. We characterize how and why strategic versus behavioral motives affect decisions in distinctive manners. In doing so, this paper also introduces and determines the behavioral benefits of pricing in leveraging consumers' behavioral regularities. We advocate that tactics which may intensify consumers' misperception of availability, such as intentionally disclosing low inventory levels, can have a far-reaching impact on improving the seller's profit.

In This Issue

In This Issue

Markdown Pricing with Unknown Fraction of Strategic Customers

A growing segment of the revenue management and pricing literature assumes “strategic” customers who are forward-looking in their pursuit of utility. Recognizing that such behavior may not be directly observable by a seller, we examine the implications of seller uncertainty over strategic customer behavior in a markdown pricing setting. We assume that some proportion of customers purchase impulsively in the first period if the price is below their willingness to pay, while other customers strategically wait for lower prices in the second period. We consider a two-period selling season in which the seller knows the aggregate demand curve but not the proportion of customers behaving strategically. We show that a robust pricing policy that requires no knowledge of the extent of strategic behavior performs remarkably well. We extend our model to a setting with stochastic demand, and show that the robust pricing policy continues to perform well, particularly as capacity is loosened or the problem is scaled up. Our results underscore the need to recognize strategic behavior, but also suggest that in many cases effective performance is possible without precise knowledge of strategic behavior.

Mark-Down Pricing

Discount sales have been increasing in Indian retailing due to the growing competition in the sector. In this research the authors analyze the data of a fashion retail store to study the effect of mark-down pricing on the sales. Their store level analysis shows that mark-downs have a positive impact on sales in an aggregate level. At a style level, however, some items showed a negative and significant effect on sales. This negative influence is explained by the predominant focus of the Store to attract high end customers characterized by conspicuous consumption.

The Promise of Strategic Customer Behavior: On the Value of Click Tracking

Click tracking is gaining in popularity and the practice of web analytics is growing fast. Whether strategic customers are willing to visit a website when they know their clicks may be tracked is an important yet complex problem which depends on various factors. Using a newsvendor framework, we examine this problem by focusing on the operational factor: how product availability induces strategic customers to voluntarily provide advance demand information. We find that a strong Nash equilibrium exists where every customer is willing to click, and customer incentives to click are robust to noise. Hence, we demonstrate the promise of strategic customer behavior in the context of click tracking, contrary to the conventional wisdom that it is typically a peril for the firm. Notably, click tracking is typically advantageous to both the firm and its customers, compared with other strategies such as advance selling, quantity commitment, availability guarantees, and quick response. Lastly, we extend to two settings by including marketing decisions: price-sensitive demand and markdown pricing, and discuss how operations and marketing decisions interact in influencing the value of click tracking.

Integrated markdown pricing and aggregate production planning in a two echelon supply chain: A hybrid fuzzy multiple objective approach

Given high variability of demands for short life cycle products, a retailer has to decide about the products’ prices and order quantities from a manufacturer. In the meantime, the manufacturer has to determine an aggregate production plan involving for example, production, inventory and work force levels in a multi period, multi product environment. Due to imprecise and fuzzy nature of products’ parameters such as unit production and replenishment costs, a hybrid fuzzy multi-objective programming model including both quantative and qualitative constraints and objectives is proposed to determine the optimalprice markdown policy and aggregate production planning in a two echelon supply chain. The model aims to maximize the total profit of manufacturer, the total profit of retailer and improving service aspects of retailing simultaneously. After applying appropriate strategies to defuzzify the original model, the equivalent multi-objective crisp model is then solved by a fuzzy goal programming method. An illustrative example is also provided to show the applicability and usefulness of the proposed model and solution method.

The Value of Clickstream Tracking: Advance Demand Information, Product Personalization and Personalized Pricing

Motivated by the fast growing practice of web analytics generated by the Internet clickstream tracking technology, I study the value of using this technology to collect advance demand information (ADI) and advance preference information (API). API can be used for product personalization and price personalization. I show that collecting ADI and conducting product personalization simultaneously typically generates significant complementarity effects. However, when consumers are strategic in markdown pricing settings, such complementarity benefit can be weakened by strategic consumer behavior and they may become substitutes. These findings provide managerial guidelines regarding how different firms (e.g., Amazon.com and Burberry) should use clickstream tracking in collecting ADI and API. I also show that ADI and price personalization may be complements: consumers are willing to reveal more accurate preference information in the presence of endogenous availability. Moreover, such endogenous availability may make price discrimination based on click behavior profitable. My results unearth the value of collaboration between Operations and Marketing in the context of clickstream tracking.

Intelligent markdown pricing

Many businesses, in a diverse range of industries, employ price markdown strategies in order to reduce wastage and losses incurred when products reach the end of their selling periods. This paper aims to demonstrate the commonalities in markdown pricing between different industries and explain the role that analytics can play in setting intelligent price reductions. We cover the nature of the markdown pricing problem and the type of infrastructure required to address the problem analytically. We discuss the importance of using the most granular data available and ensuring that analytics are integrated with existing business processes. We provide a generic approach to markdown pricing using advanced analytics and include a variety of illustrative case studies.

Pricing and Strategic Rationing When Selling to Snobbish Consumers

Firms selling to snobbish (exclusivity-seeking) consumers whose valuation decreases in the fraction of population that buys the product display several differences in their pricing and rationing strategies: some firms offer markdown pricing while others charge a uniform price, some create scarcity while others do not. This paper develops a stylized analytical model to understand the drivers behind these strategies. A monopolist sells a product over two periods to two segments of strategic (forward-looking) and snobbish consumers with high and low functional value of the product, respectively. We find that firm’s pricing and rationing strategies depend critically on the proportion of high-value consumers and on consumers’ sensitivity to consumption. The firm implements strategic rationing, i.e., it creates scarcity intentionally, only if consumers’ sensitivity to consumption is sufficiently high. Further, it is optimal to charge a uniform price when the proportion of high-value consumers is sufficiently high, and to mark the price down when the proportion of highvalue consumers is low. When the proportion of high value consumers is intermediate, the pricing policy changes with consumers’ sensitivity to consumption; higher values of sensitivity to consumption leading to markdown pricing while lower values of sensitivity to consumption leading to uniform pricing. We also show that there are two main drivers which increase the value of consumption in the first period and thereby lead to price markdowns in snob-appeal products, namely, rationing due to snobbish consumer behavior and the desire to purchase the product early in the first period when it is more exclusive, Therefore, with snobbish consumers, the firm may mark the price down even in the absence of rationing. Under certain conditions, contrary to intuition, the product can be more exclusive under markdown pricing than under uniform pricing, and more exclusivity-seeking consumer behavior can actually induce the firm to reduce the extent of exclusivity. As expected, the negative impact of strategic consumer behavior is lower when selling to snobbish consumers, because decreasing capacity to counteract strategic consumer behavior also increases product exclusivity and thus consumers’ willingness to pay. Yet, ignoring strategic consumer behavior can be more costly with snobbish consumers.

How human perceptions of Mura affect LCD market values

Liquid crystal displays (LCDs) hold a large share of the flat-panel display market because LCDs offer advantages such as low power consumption, low radiation, and good image quality. However, image defects, such as spotlight, uniformity, and Mura defects, can impair the quality of an LCD. This research examined human perceptions of region-Mura and used Response Time and subjective markdown price to indicate the various severity levels of region-Mura that appeared at different display locations.The results indicate that, within a specific Mura Level range, the Mura’s location has a considerable impact on perceived quality (p<0.001). Mura on the centers of LCDs have more impact than Mura on the corners of LCDs. Not all peripheral Mura were considered to be equal; participants chose different price markdown prices for LCDs with Mura in lower corners than they chose for LCDs with Mura in upper corners. These findings suggest that a manufacturer should establish a scraping threshold for LCDs based on information regarding Mura location to avoid the production waste from scrapping those LCDs, and should rotate the panel to position the most severe Mura in the lower part of the display to obtain a better perceived quality.

OPTIMAL MARKDOWN PRICING STRATEGY WITH DEMAND LEARNING

When launching a new product, a firm has to set an initial price with incomplete information about demand. However, after observing the demand over a period of time, the firm might decide to mark down the price, especially when the Bayesian updated belief about demand is lower than originally anticipated. We consider the case in which the manufacturer makes three decisions: initial price, when to mark down the price, and the markdown price. Modeling the cumulative demand as a Brownian motion with an unknown drift, we compute the posterior probability distribution of the unknown drift. We then show that it is optimal to mark down the price when the posterior probability is below a computable threshold. This threshold policy enables us to determine the optimal (a) regular price, (b) markdown price, and (c) markdown time. Additionally, we examine the impact of demand volatility and evaluate the value of learning.

Market Integration And Price Transmission In A Selected Area Of The South African Market

This study analyses the performance of a part of the South African market by studying the transmission mechanism of some selected market prices, price spreads and market volatility in the market. A comparative assessment of future forecasts for import and export prices is also conducted using three forecasting models – double exponential smoothing, Winters’ multiplicative method and the Box- Jenkins forecasting method. The analyses reveal that a cointegrating relationship exists between producer and consumer prices of goods, producer prices Granger-cause consumer prices but not the reverse, the transmission between producer and consumer prices of goods is asymmetrical, and price transmission is elastic and perfect in the mark- up model but inelastic and imperfect in the mark-down price transmission model.The producer price shock effect is observed with a total consumer price increase after 4 periods (1 year), exchange rates significantly explain import prices (but only a small part of oil prices), and low standard deviations of the cyclical components of the import and export prices are observed suggesting high volatility of the prices. The best forecasting model for both import and export prices is produced by the Box-Jenkins method as ARIMA (1,1,1) model.

Management Insights

Management Insights

Optimal Markdown Pricing: Implications of Inventory Display Formats in the Presence of Strategic Customers

We propose a game-theoretical model of a retailer who sells a limited inventory of a product over a finite selling season by using one of two inventory display formats: display all (DA) and display one (DO). Under DA, the retailer displays all available units so that each arriving customer has perfect information about the actual inventory level. Under DO, the retailer displays only one unit at a time so that each customer knows about product availability but not the actual inventory level. Recent research suggests that when faced with strategic consumers, the retailer could increase expected profits by making an upfront commitment to a price path. We focus on such pricing strategies in this paper, and study the potential benefit of DO compared to DA, and its effectiveness in mitigating the adverse impact of strategic consumer behavior. We find support for our hypothesis that the DO format could potentially create an increased sense of shortage risk, and hence it is better than the DA format. However, although potentially beneficial, a move from DA to DO is typically very far from eliminating the adverse impact of strategic consumer behavior. We observe that, generally, it is not important for a retailer to modify the level of inventory when moving from a DA to a DO format; a change in the display format, along with an appropriate price modification, is typically sufficient. Interestingly, across all scenarios in which a change in inventory is significantly beneficial, we observed that only one of the following two actions takes place: either the premium price is increased along with a reduction in inventory, or inventory is increased along with premium price reduction. We find that the marginal benefit of DO can vary dramatically as a function of the per-unit cost to the retailer. In particular, when the retailer's per-unit cost is relatively high, but not too high to make sales unprofitable or to justify exclusive sales to high-valuation customers only, the benefits of DO appear to be at their highest level, and could reach up to 20% increase in profit. Finally, we demonstrate that by moving from DA to DO, while keeping the price path unchanged, the volatility of the retailer's profit decreases.

Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers

We consider a retailer that sells a product with uncertain demand over a finite selling season. The retailer sets an initial stocking quantity and, at some predetermined point in the season, optimally marks down remaining inventory. We modify this classic setting by introducing three types of consumers: myopic consumers, who always purchase at the initial full price; bargain-hunting consumers, who purchase only if the discounted price is sufficiently low; and strategic consumers, who strategically choose when to make their purchase. A strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price. In equilibrium, strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices, availability of inventory, and the behavior of other consumers. We find that the retailer stocks less, takes smaller price discounts, and earns lower profit if strategic consumers are present than if there are no strategic consumers. We find that a retailer should generally avoid committing to a price path over the season (assuming such commitment is feasible)—committing to a markdown price (or to not mark down at all) is often too costly (inventory may remain unsold) even in the presence of strategic consumers; the better approach is to be cautious with the initial quantity and then mark down optimally. Furthermore, we discuss the value of quick response (the ability to procure additional inventory after obtaining updated demand information, albeit at a higher unit cost than the initial order). We find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them: on average 67% more valuable and as much as 558% more valuable in our sample. In other words, although it is well established in the literature that quick response provides value by allowing better matching of supply with demand, it provides more value, often substantially more value, by allowing a retailer to control the negative consequences of strategic consumer behavior.

Designing Optimal Preannounced Markdowns in the Presence of Rational Customers with Multiunit Demands

We analyze the optimal design of a markdown pricing mechanism with preannounced prices. In the presence of limited supply, buyers who choose to purchase at a lower price may face a scarcity in supply. Our focus is on the structure of the optimal markdown mechanisms in the presence of rational or strategic buyers who demand multiple units. We first examine a complete information setting where the set of customer valuations is known but the seller does not know the valuation of each individual customer (i.e., cannot exercise perfect price discrimination). We then generalize our analysis to an incomplete valuation information setting where customer valuations are drawn from known distributions. For both settings, we compare the seller's profit resulting from the optimal markdown mechanism and the optimal single price. We provide a number of managerial insights into designing profitable markdown mechanisms.

Pricing policies under direct vs. indirect channel competition and national vs. store brand competition

This paper analyzes channel pricing in multiple distribution channels under competition between a national brand (NB) and a store brand (SB), where an NB can be distributed both through a direct channel (e-channel) and an indirect channel (local stores) but an SB can be distributed only through an indirect channel. We first explore cross-brand and cross-channel pricing policies. Formulating the problem as a Nash pricing game, we reach two findings: (1) brand loyalty building is profitable for both an NB and an SB; and (2) marketing decisions are more restrictive for an NB channel than they are for the SB channel. We next assess supply chain coordination and reach two findings: (1) wholesale price change does not coordinate the supply chain and (2) an appropriate combination of markup and markdown prices can achieve both supply chain coordination and a win–win outcome for each channel.