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Markdown Pricing with Unknown Fraction of Strategic Customers

Author

Listed:
  • Adam J. Mersereau

    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599)

  • Dan Zhang

    (Leeds School of Business, University of Colorado at Boulder, Boulder, Colorado 80309)

Abstract

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.

Suggested Citation

  • Adam J. Mersereau & Dan Zhang, 2012. "Markdown Pricing with Unknown Fraction of Strategic Customers," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 355-370, July.
    • Handle: RePEc:inm:ormsom:v:14:y:2012:i:3:p:355-370
    DOI: 10.1287/msom.1120.0376
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    References listed on IDEAS

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