Regular Selling Season Research Articles

Opaque Selling and Inventory Management in Vertically Differentiated Markets

Problem definition: We study the emerging practice of using opaque selling to dispose of leftover inventory in vertically differentiated markets. With this selling strategy, a firm offers a synthetic product (after the regular selling season) for which consumers do not know the exact identity until after purchase. Academic/practical relevance: This opaque-selling strategy is implemented in several industries—for example, travel and retail. However, its mechanisms are yet to be fully understood, as the extant literature considers other settings wherein opaque selling’s mechanisms do not carry over to ours. Methodology: We develop a game-theoretic model featuring a firm’s inventory and dynamic selling strategies and consumers’ strategic waiting. We characterize the optimal inventory levels, product offerings, and prices. Results: We find that, compared with last-minute selling (i.e., selling leftover inventory separately), opaque selling increases regular-season profits by softening intertemporal cannibalization from sales-season products to high-quality products sold in the regular season. However, it may decrease sales-season profits, as products with different qualities are probabilistically allocated to all purchasing consumers, irrespective of their valuations. We further demonstrate that these mechanisms are fundamentally different from those identified in the literature for other settings, and this contrast generates opposite recommendations as for the optimal usage of opaque selling. With endogenous inventory, interestingly, opaque selling is even more attractive, and it prompts the firm to procure fewer high-quality products than under last-minute selling. Managerial implications: We demonstrate the value of opaque selling as an inventory-clearance strategy in vertical markets. We show that a firm can further strengthen its profitability by combining opaque selling with inventory management. We also provide guidelines on managing inventory and illustrate the nontrivial impact of opaque selling.

Optimal Pricing and Inventory Planning with Charitable Donations

Problem definition: This paper investigates firms’ optimal operational decisions and after-tax profits with regard to tax deduction for charitable donations. Academic/practical relevance: Motivated by the steady growth in noncash donations from U.S. companies, our work is the first to provide theoretical guidance on operational planning under tax deduction for both precommitted donations and end-of-season donations. Methodology: We analyze the impact of tax deduction for a profit-driven firm under a two-period price-markdown newsvendor model and characterize the firm’s optimal price and quantity decisions. Results: The firm’s optimal donation behavior is driven by two factors—fixed cost and demand uncertainty. Specifically, a positive fixed cost can induce precommitted donation during the regular selling season, and demand uncertainty can induce end-of-season donation during the clearance period. Managerial insights: The enhanced tax deduction that is designed to encourage charitable donations results in unexpected behavior by the firm. For example, the firm’s optimal clearance price can increase with the amount of leftover inventory, and the firm’s optimal after-tax profit can increase as the tax rate increases. While the value of the deduction is tied to the fair market value (and the price) of the product, surprisingly, the firm may find it more profitable to charge a lower price, because the lower price may scale up the demand uncertainty and consequently increase the expected tax subsidy under the enhanced tax deduction. Our analysis reveals important insights about the impact of the tax law on a monopolist’s optimal operational decisions and profit. The online appendix is available at https://doi.org/10.1287/msom.2017.0676 .

Opaque Selling and Last-Minute Selling: Revenue Management in Vertically Differentiated Markets

Problem definition: We study the emerging practice of using opaque selling to dispose of leftover inventory in vertically differentiated markets. With this selling strategy, a firm offers a synthetic product (after the regular selling season) for which consumers do not know the exact identity until after purchase. Academic/practical relevance: This opaque selling strategy is implemented in several industries, e.g., travel and retail. However, its mechanisms are yet to be fully understood as the extant literature considers other settings wherein opaque selling’s mechanisms do not carry over to ours. Methodology: We develop a game-theoretic model featuring a firm’s inventory and dynamic selling strategies and consumers’ strategic waiting. We characterize the optimal inventory levels, product offerings, and prices. Results: We find that, compared to last-minute selling (i.e., selling leftover inventory separately), opaque selling increases regular-season profits by softening inter-temporal cannibalization from sales-season products to high-quality products sold in the regular season. However, it may decrease sales-season profits as products with different qualities are probabilistically allocated to all purchasing consumers, irrespective of their valuations. We further demonstrate that these mechanisms are fundamentally different from those identified in the literature for other settings, and this contrast generates opposite recommendations as for the optimal usage of opaque selling. With endogenous inventory, interestingly, opaque selling is even more attractive and it prompts the firm to procure fewer high-quality products than under last-minute selling. Managerial implications: We demonstrate the value of opaque selling as an inventory clearance strategy in vertical markets. We show that a firm can further strengthen its profitability by combining opaque selling with inventory management. We also provide guidelines on managing inventory and illustrate the non-trivial impact of opaque selling.

Advance selling in the presence of product diffusion effect

Product diffusion refers to the phenomenon that the later demand is dependent on the early sales. To investigate how a firm’s advance selling strategy is affected by the effect of product diffusion, we consider a monopolist seller who sells a fashionable product in a market that comprises of myopic and strategic consumers over two periods (i.e., the advance selling season and the regular selling season). For a linear product diffusion effect we find that, when the effect of product diffusion is positive, the seller may set an extremely high advance selling price to induce the strategic consumers to purchase in the regular selling season, which is counter-intuitive. Moreover, the optimal procurement quantity for the seller may increase in the negative effect of product diffusion and decrease in the amount of strategic consumers. When we extend our model to consider a concave quadratic product diffusion effect, however, the optimal procurement quantity is concave in the amount of strategic consumers. Numerical studies are further presented to discuss the managerial insights.

Advance Selling, Competition, and Brand Substitutability

This paper studies the impact of competition on the benefits of advance selling. I construct a two-period price-setting game with heterogeneous consumers and two firms that produce different brands. Some consumers prefer one brand, others prefer the other brand. Consumers derive common value from their preferred brand, but they differ in how strongly they dislike their less preferred brand. I consider the situation in which one firm can offer consumers the opportunity to pre-order its product in advance of the regular selling season. I calculate the benefits of advance selling when this firm faces competition from the other firm in the regular selling season and when it does not. I show that competition enhances the benefits of advance selling when in the advance selling season consumers are uncertain about which brand they will prefer. Comparative statics analysis with respect to brand substitutability reveals some interesting results. For example, I find that in the competitive setting the firm has greater incentives to advance sell when the brands are more substitutable, while the reverse holds in the monopolistic setting.

Learning in Advance Selling with Heterogeneous Consumers

The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.

Advance selling strategies for oligopolists by considering product diffusion effect

Purpose – The purpose of this paper is to study the advance selling strategies for oligopolists when considering the product diffusion effect. Design/methodology/approach – The authors consider a market that composes of two competitive sellers who are different in their reputation. The two firms sell the same product in the market over two periods (i.e. the advance selling season and the regular selling season). Due to the effect of product diffusion, the demand of each firm in the regular selling season is dependent on the two firms’ advance demands. Findings – For the firm with lower reputation, it is beneficial to decrease the advance selling price with the diffusion effect caused by its advance demand. For the firm with higher reputation, it is also beneficial to decrease the advance selling price with the diffusion effect caused by its advance demand if the consumers’ enthusiasm for the product in regular selling season is high enough; otherwise it should not decrease his advance selling price since this practice cannot greatly increase his demand. Practical implications – The obtained results can provide operational managers in reality with valuable suggestions in making advance selling decisions. Originality/value – The paper is among the first to investigate the impact of product diffusion effect on a firm’s advance selling strategy in a competitive setting.

Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee?

I consider a retailer who sells a new product over two periods: advance and regular selling seasons. Experienced consumers learn their valuations for the product in the advance selling season, while inexperienced consumers learn only when the product becomes available in the regular selling season. The retailer is uncertain about the number of inexperienced consumers. Production takes place between the periods. Unsold units are scrapped at a price that is below the retailer’s marginal cost, which makes it costly to produce and not sell. I show that when consumers are less heterogeneous in their valuations, the retailer should implement advance selling and offer a pre-order price guarantee. For some parameter configurations a pre-order price guarantee acts as a commitment device not to decrease the price in the regular selling season. In other situations, it enables the seller to react to the information that is obtained from pre-orders by increasing or decreasing the price. When consumers are more heterogeneous in their valuations, the market size uncertainty is small, or the scrap value is high, the retailer should not implement advance selling.

Two strategies for dynamic perishable product pricing to consider in strategic consumer behaviour

The study investigates two dynamic pricing strategies, namely posterior price matching (PM) and delay posterior price matching (DPM). These strategies are used by sellers to consider consumer behaviour in a market with several types of consumers. We analyze reduction season price, purchasing equilibrium and regular selling season price using equilibrium theory and backward induction method. A comparison of these two strategies indicates that both PM and DPM enable sellers to increase price in a regular selling season. Hassle cost and valuation differences between high- and low-end consumers influence the profits and decisions of the seller. PM is the best choice when valuations of low- and high-end consumers vary significantly. When the strategic consumer delaying fraction is small, the advantages of PM are more evident than those of DPM. However, DPM is the best choice when the difference between the valuations of low- and high-end consumers is small, and the strategic consumer delaying fraction is large. An increase in hassle cost also affects the seller’s strategy choice and profits; this effect decreases as strategic consumer delaying fraction increases.

Initial Shipment Decisions for New Products at Zara

Given uncertain popularity of new products by location, fast fashion retailer Zara faces a trade-off. Large initial shipments to stores reduce lost sales in the critical first days of the product life cycle, but maintaining stock at the warehouse allows restocking flexibility once initial sales are observed. In collaboration with Zara, we develop and test a decision support system featuring a data-driven model of forecast updating and a dynamic optimization formulation for allocating limited stock by location over time. A controlled field experiment run worldwide with 34 articles during the 2012 season showed an increase in total average season sales by approximately 2% and a reduction in the number of unsold units at the end of the regular selling season by approximately 4%.

Initial Shipment Decisions for New Products at Zara

Given uncertain popularity of new products by location, fast fashion retailer Zara faces a tradeoff. Large initial shipments to stores reduce lost sales in the critical first days of the product life cycle, but maintaining stock at the warehouse allows restocking flexibility once initial sales are observed. In collaboration with Zara, we develop and test a decision support system featuring a data-driven model of forecast updating and a dynamic optimization formulation for allocating limited stock by location over time. A controlled field experiment run worldwide with 34 articles during the 2012 season showed an increase in total average season sales by approximately 2% and a reduction in the number of unsold units at the end of the regular selling season by approximately 4%.

Performance of weather-conditional rebates under different risk preferences

Retailers who sell seasonal products often face challenges in demand management due to weather uncertainty. In many cases, they make their ordering and pricing decisions prior to the regular selling season but the vast majority of sales do not occur until after the season starts, during which unfavorable weather conditions may result in high monetary losses. To protect against such adverse financial outcomes, retailers may offer weather-linked promotions such as weather rebates and induce customers to make early purchases. Specifically, weather-conditional rebates are incentives offered in an advance promotional period to be paid to the early buyers if the weather state in the regular season is unfavorable. In the presence of seasonal weather uncertainty, risk attitudes of retailers and buyers may play an important role on the effectiveness of these promotions. In this paper, we analyze the performance of weather-conditional rebates by explicitly considering the impact of different risk behaviors. First, we study the case in which the retailer and customers are risk-neutral and show that the weather-conditional rebates are effective in increasing the retailer's profits. Under the assumption of the retailer's risk-neutrality, we conduct a simulation study to investigate the impact of customers' alternative early-purchase behaviors on the performance of the rebate program. Next, we consider a risk-averse retailer. We model the retailer's risk aversion primarily in the mean–variance framework and find that the rebate program can be designed to increase the mean profit and reduce the profit variance simultaneously. Furthermore, by combining the rebate program with a financial instrument such as binary weather options, the retailer can obtain greater benefits from weather-conditional rebates.

Learning in Advance Selling with Heterogeneous Consumers

Advance selling occurs when consumers order a firm's product prior to the regular selling season. It reduces uncertainty for both the firm and the buyers and enables the firm to better forecast its future demand. The distinctive feature of this paper is that there are both experienced and inexperienced consumers, with the former knowing their valuations of the product in advance. We show that pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.

Buy Now and Match Later: Impact of Posterior Price Matching on Profit with Strategic Consumers

With a posterior price matching (PM) policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior PM policy on consumers' purchasing behavior, a seller's pricing and inventory decisions, and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but can implement a posterior PM policy. We find that the PM policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the PM policy can substantially improve the seller's profit, as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller must either pay the refund that consumers will claim or forgo the salvage value of any leftover inventory. The PM policy can be detrimental when there are only a few strategic consumers or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund. From the consumers' perspective, the PM policy generally reduces consumer surplus; however, there are cases where consumer surplus can be increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.

Buy Now and Match Later: The Impact of Posterior Price Matching on Profit with Strategic Consumers

With a posterior price matching policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior price matching policy on consumers' purchasing behavior, a seller's pricing and inventory decisions and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but, can implement a posterior price matching policy. We find that the price matching policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the price matching policy can improve the seller's profit substantially as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they otherwise wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller has to either pay the refund that the consumers will claim or forgo the salvage value of any leftover inventory. The price matching policy can be detrimental when there are only a few strategic consumers present, or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund or to the correctness of the belief on the fraction of strategic consumers in the market. From the perspective of consumers, the price matching policy generally reduces consumer surplus, however, there are cases where consumer surplus can be also increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.

Coordinated ordering decisions for products with short lifecycle and variable selling price

The supplier–buyer coordination is an important policy in the supply chain management. The buyer in the two-echelon inventory system with regular selling season has to face the uncertainty of customer demand, supplier’s delivery time and variable price change. At the same time, the supplier has to consider the inventory holding and delay cost. The objective of this study is to develop an integrated supply chain strategy for products with short lifecycle and variable selling price to entice cooperation. The strategy must provide a win–win situation for both the supplier and the buyer. A numerical case example, sensitivity analysis and compensation mechanism are given to illustrate the model.

Advance Booking Discount Programs Under Retail Competition

We model a situation in which two retailers consider launching an “Advance Booking Discount” (ABD) program. In this program, customers are enticed to precommit their orders at a discount price prior to the regular selling season. However, these precommitted orders are filled during the selling season. While the ABD program enables the retailers to lock in a portion of the customer demand and use this demand information to develop more accurate forecasts and supply plans, the ABD price reduces profit margin. We analyze the four possible scenarios wherein each of the two firms offer an ABD program or not, and establish conditions under which the unique equilibrium calls for launching the ABD program at both retailers.