Markdowns in Seasonal Conspicuous Goods

Abstract

In common parlance, luxury and markdowns are, in many respects, contradictory concepts. Markdowns decrease product exclusivity and hence consumers’ willingness to pay (i.e., snob effect) since most consumers purchasing luxury desire uniqueness. Markdowns also encourage strategic (forward-looking) consumers to wait for lower prices (i.e., strategic effect). Yet, luxury retailers frequently adopt markdowns in practice to stimulate the demand for their seasonal products (i.e., sales effect). To study the impact of these three countervailing effects on a luxury retailer’s markdown policy and rationing strategy, this paper develops a game-theoretic model with strategic and exclusivity-seeking consumers who have heterogeneous (high and low) valuations. We characterize a luxury retailer’s equilibrium markdown and rationing strategies, and find that the retailer induces a buying frenzy (i.e., selling deliberately less than the demand) to increase consumers’ willingness to pay when they are sufficiently exclusivity-seeking. We show that the retailer’s markdown policy depends on consumers’ desire for exclusivity when the proportion of consumers with high valuation is not too high or too low. Interestingly, we find that, in such cases, consumers’ higher desire for exclusivity does not motivate the retailer to increase exclusivity and to adopt uniform pricing. To the contrary, it motivates the retailer to decrease the exclusivity and to adopt markdowns. By doing so, we identify exclusivity-seeking consumer behavior as another rationale behind markdown pricing. Lastly, we find that, when selling to exclusivity-seeking consumers, the negative impact of strategic consumer behavior is lower; however, ignoring it can be more costly.

Keywords: conspicuous consumption; strategic consumers; luxury products; markdown pricing; buying frenzy