Managing Posterior Price Matching: The Role of Customer Boundedly Rational Expectations

Tingliang Huang (), Zhe Yin () and Ying-Ju Chen ()
Additional contact information
Tingliang Huang: Carroll School of Management, Boston College, Chestnut Hill, Massachusetts 02467
Zhe Yin: School of Management, Shanghai University, Shanghai 200444, China
Ying-Ju Chen: School of Business and Management and School of Engineering, Hong Kong University of Science and Technology, Hong Kong

Manufacturing & Service Operations Management, 2017, vol. 19, issue 3, 385-402

Abstract: The posterior price-matching policy, whereby a firm promises to reimburse the price difference to a customer who purchases a product before the firm marks it down, has been used in practice. The extensive literature has offered the following explanations for why posterior price matching is adopted: to reduce inventory, to soften competition, to price discriminate consumers, and to eliminate consumer strategic waiting incentives. In this paper, we provide a novel explanation and investigate the role of consumer bounded rationality in the sense of anecdotal reasoning. We adopt a simple model that allows us to isolate the role of customer bounded rationality on using posterior price matching. We demonstrate that while it is never optimal to adopt posterior price matching when consumers have rational expectations, it can be optimal when they have boundedly rational expectations. We show when and how a seller can intentionally mark down with some probability and adopt price matching to make a profit. Ignoring customer bounded rationality can result in a significant profit loss. Then, we build a dynamic programming model to investigate how the firm should dynamically manage its markdowns over the long run. We show that a cyclic policy switching between a high and low markdown probability is typically optimal for exploiting customer bounded rationality. We characterize the nature of the cyclic policy and the range in which it is optimal. Our findings underscore the importance of consumer bounded rationality and provide managerial and practical guidelines on how to manage price matching when customers are boundedly rational.

Keywords: posterior price matching; markdown; dynamic programming; bounded rationality; pricing (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://doi.org/10.1287/msom.2016.0612 (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:ormsom:v:19:y:2017:i:3:p:385-402

Access Statistics for this article

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