Markdowns in Seasonal Conspicuous Goods

Marketing Science, 39 (5), 1016-1029 , doi: 10.1287/mksc.2020.1223

Posted: 7 Apr 2012 Last revised: 7 Oct 2020

See all articles by Kenan Arifoglu

Kenan Arifoglu

UCL School of Management, University College London

Sarang Deo

Indian School of Business (ISB), Hyderabad - Operations Management

Seyed Iravani

Northwestern University - Department of Industrial Engineering and Management Sciences

Date Written: February 2, 2019

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

Suggested Citation

Arifoglu, Kenan and Deo, Sarang and Iravani, Seyed, Markdowns in Seasonal Conspicuous Goods (February 2, 2019). Marketing Science, 39 (5), 1016-1029 , doi: 10.1287/mksc.2020.1223, Available at SSRN: https://ssrn.com/abstract=2035606 or http://dx.doi.org/10.2139/ssrn.2035606

Kenan Arifoglu (Contact Author)

UCL School of Management, University College London ( email )

Level 38
One Canada Square
London, England E14 5AB
United Kingdom

Sarang Deo

Indian School of Business (ISB), Hyderabad - Operations Management ( email )

India

HOME PAGE: http://www.isb.edu/faculty-research/faculty/directory/deo-sarang

Seyed Iravani

Northwestern University - Department of Industrial Engineering and Management Sciences ( email )

Evanston, IL 60208-3119
United States

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