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The Supply Chain Impact of Smart Customers in a Promotional Environment

  • Arnd Huchzermeier

    ()

    (WHU, Otto-Beisheim Graduate School of Management, Burgplatz 2, 56179 Vallendar, Germany)

  • Ananth Iyer

    ()

    (Krannert Graduate School of Management, Purdue University, 1310 Krannert Building, West Lafayette, Indiana 47907--1310)

  • Julia Freiheit

    ()

    (WHU, Otto-Beisheim Graduate School of Management, Burgplatz 2, 56179 Vallendar, Germany)

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    Increasing product variety through the use of alternate package sizes is a commonly observed mechanism in the grocery industry. Under such a scheme, however, the response to pricing decisions for each of the different package sizes is affected by how customers make demand choices. We build a demand model in which customers react smart to retail promotions through stockpiling and package size switching. The demand model combines a customer choice model with a model in which customers differ in their stockpiling and reservation price levels. We utilize data from the German grocery industry for an empirical fitting of the model. We then develop a store-level inventory model for each SKU and optimize price promotions to maximize expected profit. We show the benefit of capturing the smart customer response to price promotions by demonstrating its impact on the reduced inventory costs. We use the model to generate a number of managerial implications of the model for the German grocery environment.

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    File URL: http://dx.doi.org/10.1287/msom.4.3.228.7755
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    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 4 (2002)
    Issue (Month): 3 (November)
    Pages: 228-240

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    Handle: RePEc:inm:ormsom:v:4:y:2002:i:3:p:228-240
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    1. Eppen, Gary D & Liebermann, Yehoshua, 1984. "Why Do Retailers Deal? An Inventory Explanation," The Journal of Business, University of Chicago Press, vol. 57(4), pages 519-30, October.
    2. Jorge M. Silva-Risso & Randolph E. Bucklin & Donald G. Morrison, 1999. "A Decision Support System for Planning Manufacturers' Sales Promotion Calendars," Marketing Science, INFORMS, vol. 18(3), pages 274-300.
    3. Jeuland, Abel P & Narasimhan, Chakravarthi, 1985. "Dealing-Temporary Price Cuts-by Seller as a Buyer Discrimination Mechanism," The Journal of Business, University of Chicago Press, vol. 58(3), pages 295-308, July.
    4. Kirthi Kalyanam, 1996. "Pricing Decisions Under Demand Uncertainty: A Bayesian Mixture Model Approach," Marketing Science, INFORMS, vol. 15(3), pages 207-221.
    5. Vincent R. Nijs & Marnik G. Dekimpe & Jan-Benedict E.M. Steenkamps & Dominique M. Hanssens, 2001. "The Category-Demand Effects of Price Promotions," Marketing Science, INFORMS, vol. 20(1), pages 1-22, September.
    6. Kelvin Lancaster, 1990. "The Economics of Product Variety: A Survey," Marketing Science, INFORMS, vol. 9(3), pages 189-206.
    7. Füsun Gönül & Kannan Srinivasan, 1993. "Modeling Multiple Sources of Heterogeneity in Multinomial Logit Models: Methodological and Managerial Issues," Marketing Science, INFORMS, vol. 12(3), pages 213-229.
    8. Purushottam Papatla, 1996. "A Multiplicative Fixed-Effects Model of Consumer Choice," Marketing Science, INFORMS, vol. 15(3), pages 243-261.
    9. Pradeep K. Chintagunta, 1998. "Inertia and Variety Seeking in a Model of Brand-Purchase Timing," Marketing Science, INFORMS, vol. 17(3), pages 253-270.
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