Price Protection Policies With Strategic Consumers And Demand Uncertainty

With the rapid development of information technology, the channels for the consumers in the market to obtain useful information from massive data is more than before, and their ability to access information is also more skilled. In this way, the consumer behavior is more difficult to grasp for the enterprises. Those enterprises need to make more efforts to deal with the complex psychology and behavior of consumers. In reality, some consumers make their decisions of purchasing immediately or waiting for the sale when the price drops according to product’s price and the availability in the future. They choose when to purchase to maximize their consuming surplus of the choice. Scholars consider this kind of consumers as strategic consumers. This strategic behavior aggravates the uncertainty of demand, which is harmful to the retailers and brings them new challenges. They take many measures to deal with those adverse effects. Meanwhile this behavior attracts many scholars’ research, they come up with some strategies after theoretical research and empirical research.This paper studies a retailer’s decision on the price and inventory when facing strategic consumer behavior and demand uncertainty by using price protection. Price protection is a kind of rebate that the retailer provides to consumers when the price drops during the selling season. The retailer can choose whether to adopt the price protection policy or not. There are three alternative strategies for retailer:(1) no price protection policy, (2) full price protection policy, i.e. the retailer compensates the consumers with the full amount of the price drop, (3) 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 expectation equilibrium, we analyze retailer’s optimal price and order quantity under each policy, and compare optimal decisions and maximum profits of three policies.From the results, the price protection has positive influences on the retailer. It can simultaneously increase retailer’s profit and decrease inventory risk. Meantime, full price protection is chosen as the optimal policy. We find the price protection can induce those strategic consumers to purchase at the first period because of its lower order quantity. This strategy also can reduce consumers’concern on the drop of price, which improves the quality of retailer’s service.Finally, we compare full price protection’s impact with price commitment. Full price protection is considered as the most profitable strategy while price commitment can bring lower inventory risk. In addition, we study the price protection’s impact on the supply chain, and the profit of supplier would decrease because of price protection.The main innovations and practical significance of this paper are:(1) This paper focuses on strategic consumer behavior which is more related to current market background. (2) We expand the existing research on strategic consumers and put forward new strategies to deal with the negative impacts of strategic consumers. (3) The research about price protection in previous studies are between retailers and suppliers, but in this paper it is between retailers and consumers. (4) The price protection can help retailers to make better decisions, reduce risk and increase profits, providing a good choice for retailers in the actual strategy.