Markdown or Everyday Low Price? The Role of Behavioral Motives

Özalp Özer () and Yanchong Zheng ()
Additional contact information
Özalp Özer: Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080
Yanchong Zheng: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139

Management Science, 2016, vol. 62, issue 2, 326-346

Abstract: 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 .

Keywords: regret; availability misperception; markdown; everyday low price; inventory rationing; revenue management; consumer model; behavioral economics (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2014.2147 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:62:y:2016:i:2:p:326-346

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().