Buy now and match later

impact of posterior price matching on profit with strategic consumers

Guoming Lai, Laurens G Debo, Katia Sycara

Research output: Contribution to journalArticle

75 Citations (Scopus)

Abstract

With a posterior price matching (PM) policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior PM policy on consumers' purchasing behavior, a seller's pricing and inventory decisions, and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but can implement a posterior PM policy. We find that the PM policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the PM policy can substantially improve the seller's profit, as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller must either pay the refund that consumers will claim or forgo the salvage value of any leftover inventory. The PM policy can be detrimental when there are only a few strategic consumers or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund. From the consumers' perspective, the PM policy generally reduces consumer surplus; however, there are cases where consumer surplus can be increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.
Original languageEnglish
Pages (from-to)33-55
Number of pages23
JournalManufacturing and Service Operations Management
Volume12
Issue number1
Early online date10 Feb 2009
DOIs
Publication statusPublished - 2010

Fingerprint

Profit
Price matching
Seller
Refunds
Consumer surplus
Incentives
Guarantee
Proportion
Pareto improvement
Retailers
Fixed price
Costs
Purchasing behavior
Inventory investment
Pricing

Keywords

  • strategic consumers
  • inventory management
  • pricing
  • discounts
  • rational expectations equilibrium

Cite this

Buy now and match later : impact of posterior price matching on profit with strategic consumers. / Lai, Guoming; Debo, Laurens G; Sycara, Katia.

In: Manufacturing and Service Operations Management, Vol. 12, No. 1, 2010, p. 33-55.

Research output: Contribution to journalArticle

@article{8555d5c6198e4e368ae4ea41e6a10454,
title = "Buy now and match later: impact of posterior price matching on profit with strategic consumers",
abstract = "With a posterior price matching (PM) policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior PM policy on consumers' purchasing behavior, a seller's pricing and inventory decisions, and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but can implement a posterior PM policy. We find that the PM policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the PM policy can substantially improve the seller's profit, as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller must either pay the refund that consumers will claim or forgo the salvage value of any leftover inventory. The PM policy can be detrimental when there are only a few strategic consumers or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund. From the consumers' perspective, the PM policy generally reduces consumer surplus; however, there are cases where consumer surplus can be increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.",
keywords = "strategic consumers, inventory management, pricing , discounts, rational expectations equilibrium",
author = "Guoming Lai and Debo, {Laurens G} and Katia Sycara",
year = "2010",
doi = "10.1287/msom.1080.0248",
language = "English",
volume = "12",
pages = "33--55",
journal = "Manufacturing and Service Operations Management",
issn = "1523-4614",
publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",
number = "1",

}

TY - JOUR

T1 - Buy now and match later

T2 - impact of posterior price matching on profit with strategic consumers

AU - Lai, Guoming

AU - Debo, Laurens G

AU - Sycara, Katia

PY - 2010

Y1 - 2010

N2 - With a posterior price matching (PM) policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior PM policy on consumers' purchasing behavior, a seller's pricing and inventory decisions, and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but can implement a posterior PM policy. We find that the PM policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the PM policy can substantially improve the seller's profit, as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller must either pay the refund that consumers will claim or forgo the salvage value of any leftover inventory. The PM policy can be detrimental when there are only a few strategic consumers or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund. From the consumers' perspective, the PM policy generally reduces consumer surplus; however, there are cases where consumer surplus can be increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.

AB - With a posterior price matching (PM) policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior PM policy on consumers' purchasing behavior, a seller's pricing and inventory decisions, and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but can implement a posterior PM policy. We find that the PM policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the PM policy can substantially improve the seller's profit, as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller must either pay the refund that consumers will claim or forgo the salvage value of any leftover inventory. The PM policy can be detrimental when there are only a few strategic consumers or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund. From the consumers' perspective, the PM policy generally reduces consumer surplus; however, there are cases where consumer surplus can be increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.

KW - strategic consumers

KW - inventory management

KW - pricing

KW - discounts

KW - rational expectations equilibrium

U2 - 10.1287/msom.1080.0248

DO - 10.1287/msom.1080.0248

M3 - Article

VL - 12

SP - 33

EP - 55

JO - Manufacturing and Service Operations Management

JF - Manufacturing and Service Operations Management

SN - 1523-4614

IS - 1

ER -