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...

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Bibliographic Details
Published in:Manufacturing & service operations management 2012-07, Vol.14 (3), p.355-370
Main Authors: Mersereau, Adam J, Zhang, Dan
Format: Article
Language:English
Subjects:
Analysis
Consumer behavior
Customers
Economic aspects
Forecasts and trends
Manufacturing industry
Pricing
pricing and revenue management
Pricing policies
Retailing
Revenue management
Studies
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Summary: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.
ISSN:1523-4614
1526-5498
DOI:10.1287/msom.1120.0376