Is entering the low-end market better? The implication of managing out-of-season product with pricing strategies

Contemporary retailers face a critical marketing decision in managing out-of-season products: whether to introduce them into low-end markets or to dispose of them entirely. This paper characterizes three pricing mechanisms free pricing, differentiated pricing, and uniform pricing to investigate how retailers strategically select among these options alongside the scrapping alternative. Our principal findings are as follows. First, when scrapping costs are low, retailers are inclined to adopt a scrapping strategy; however, when scrapping costs are high, the decision depends on factors such as sales rate, negative brand effects, and the size of the low-end market. Specifically, when the low-end market is small and the sales rate is moderate, retailers tend to prefer a free pricing strategy, whereas an expanding low-end market supports a uniform pricing strategy. Additionally, increases in the sales rate and negative brand impact drive firms toward a differentiated pricing approach to mitigate adverse brand perceptions and attract price-sensitive consumers. Second, selling out-of-season products can be environmentally beneficial under conditions of low scrapping costs with minimal environmental impact, or in scenarios where both scrapping costs and associated pollution are comparatively high. Finally, and counterintuitively, our results indicate that profitability, consumer surplus and social welfare do not necessarily increase with the sales rate; instead, they may decrease when the sales rate exceeds a relatively high threshold. An important implication for the retailer is that pursuing an excessively high sales rate may be detrimental to both retailer profit and social welfare.