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Price protection policies with demand uncertainty and strategic consumers

Tingting Wang (School of Management, University of Science and Technology of China, Hefei, China)
Chuiri Zhou (School of Management, University of Science and Technology of China, Hefei, China)

Journal of Modelling in Management

ISSN: 1746-5664

Article publication date: 8 May 2017

Abstract

Purpose

This paper aims to study a retailer’s decision on the price and inventory when facing strategic consumer behavior and demand uncertainty. Price protection is a kind of rebate that the retailer provides to consumers when the price drops during the selling season. The research investigates whether price protection can bring the retailer advantages. This paper compares price protection’s impact with price commitment. In addition, the paper studies the price protection’s impacts on supplier of the supply chain.

Design/methodology/approach

In this model, there are three alternative strategies for retailer: no price protection policy, full price protection policy and partial price protection policy. The selling season is divided into two periods: regular period and sale period. In the regular period, the products are sold at a regular price. In the sale one, the products are sold at a lower price. By adopting rational expectations equilibrium, this paper analyzes retailer’s optimal price and order quantity under each policy and compares optimal decisions and maximum profits of three policies.

Findings

This paper finds that the price protection has a positive influence on the retailer. Strategic consumers are induced to purchase at the regular period. It can simultaneously increase retailer’s profit and reduce inventory risk. Meantime, full price protection is chosen as the optimal policy. By comparing full price protection’s impacts with price commitment, full price protection is considered as the most profitable strategy, while price commitment can bring lower inventory risk. In addition, the profit of supplier would decrease because of price protection.

Originality/value

This research provides a new method to address the negative effects of strategic consumer behavior. It also brings some managerial insights to some retailers, especially online ones, on whether to adopt price protection.

Keywords

Acknowledgements

This research was supported by National Social Science Foundation, China, No. 14BGL002; Youth Foundation of Humanities and Social Sciences of the Ministry, China, No. 10YJC630415; and Philosophy and Social Science Foundation of Anhui, No. AHSK11-12D359.

Citation

Wang, T. and Zhou, C. (2017), "Price protection policies with demand uncertainty and strategic consumers", Journal of Modelling in Management, Vol. 12 No. 2, pp. 190-203. https://doi.org/10.1108/JM2-07-2015-0048

Publisher

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Emerald Publishing Limited

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