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Selling with Binding Reservations in the Presence of Strategic Consumers

Author

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  • Nikolay Osadchiy

    (Information Systems and Operations Management Department, Goizueta Business School, Emory University, Atlanta, Georgia 30322)

  • Gustavo Vulcano

    (Department of Information, Operations and Management Sciences, Leonard N. Stern School of Business, New York University, New York, New York 10012)

Abstract

We analyze a revenue management problem in which a seller endowed with an initial inventory operates a selling with binding reservations scheme. Upon arrival, each consumer, trying to maximize his own utility, must decide either to buy at the full price and get the item immediately or to place a nonwithdrawable reservation at a discount price and wait until the end of the sales season where the leftover units are allocated according to first-come-first-serve priority. We prove the existence of an equilibrium consumer's strategy in this game and develop a simple and accurate asymptotic approximation for it. Through an extensive numerical study, we find that our proposed mechanism delivers higher revenues than the markdown practice with a preannounced fixed discount. The benefit is more emphasized when the seller is more patient than the consumers and (1) the ratio between the number of units put up for sale and the expected demand is moderate and/or (2) the heterogeneity of the consumers' valuations is moderate to high. In our numerical experiments, the revenue gap can reach more than 12%, which is quite significant for retail businesses that typically operate with narrow margins.

Suggested Citation

  • Nikolay Osadchiy & Gustavo Vulcano, 2010. "Selling with Binding Reservations in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 56(12), pages 2173-2190, December.
    • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:12:p:2173-2190
    DOI: 10.1287/mnsc.1100.1245
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    References listed on IDEAS

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    Cited by:

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    6. Luis Briceño-Arias & José R. Correa & Andrés Perlroth, 2017. "Optimal Continuous Pricing with Strategic Consumers," Management Science, INFORMS, vol. 63(8), pages 2741-2755, August.
    7. Manel Baucells & Nikolay Osadchiy & Anton Ovchinnikov, 2017. "Behavioral Anomalies in Consumer Wait-or-Buy Decisions and Their Implications for Markdown Management," Operations Research, INFORMS, vol. 65(2), pages 357-378, April.
    8. Imsu Park & Ilyoung Jung & Jeonghoon Choi, 2020. "Market competition and pricing strategies in retail supply chains," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(8), pages 1528-1538, December.
    9. Yingxiao Li & Jianheng Zhou, 2023. "Modeling the relationship between fairness concern and customer loyalty in dual distribution channel," Journal of Combinatorial Optimization, Springer, vol. 45(1), pages 1-25, January.
    10. Yossi Aviv & Mike Mingcheng Wei & Fuqiang Zhang, 2019. "Responsive Pricing of Fashion Products: The Effects of Demand Learning and Strategic Consumer Behavior," Management Science, INFORMS, vol. 65(7), pages 2982-3000, July.
    11. José Correa & Ricardo Montoya & Charles Thraves, 2016. "Contingent Preannounced Pricing Policies with Strategic Consumers," Operations Research, INFORMS, vol. 64(1), pages 251-272, February.
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    13. Yen-Ting Lin & Ali K. Parlaktürk & Jayashankar M. Swaminathan, 2018. "Are Strategic Customers Bad for a Supply Chain?," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 481-497, July.
    14. Wu, Meng & Ran, Yun & Zhu, Stuart X., 2022. "Optimal pricing strategy: How to sell to strategic consumers?," International Journal of Production Economics, Elsevier, vol. 244(C).
    15. Ye, Taofeng & Yang, Huiqiang, 2020. "Price and Quality Management with Strategic Consumers: Whether to Introduce a High or Low Product Variant," Applied Mathematics and Computation, Elsevier, vol. 386(C).
    16. Jaelynn Oh & Xuanming Su, 2022. "Optimal Pricing and Overbooking of Reservations," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 928-940, March.
    17. So Yeon Chun & Anton Ovchinnikov, 2019. "Strategic Consumers, Revenue Management, and the Design of Loyalty Programs," Management Science, INFORMS, vol. 65(9), pages 3969-3987, September.
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    19. René Caldentey & Ying Liu & Ilan Lobel, 2017. "Intertemporal Pricing Under Minimax Regret," Operations Research, INFORMS, vol. 65(1), pages 104-129, February.
    20. Yao Cui & Izak Duenyas & Ozge Sahin, 2018. "Pricing of Conditional Upgrades in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 64(7), pages 3208-3226, July.

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