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Behavioral Anomalies in Consumer Wait-or-Buy Decisions and Their Implications for Markdown Management

"Behavioral Anomalies in Consumer Wait-or-Buy Decisions and Their Implications for Markdown Management" Manel Baucells, Nikolay Osadchiy, Anton Ovchinnikov. Operations Research, 2016, DOI: org/10.1287/opre.2016.1547

Posted: 31 Oct 2014 Last revised: 19 Nov 2016

Manel Baucells

University of Virginia - Darden School of Business

Nikolay Osadchiy

Emory University - Goizueta Business School

Anton Ovchinnikov

Queen's School of Business

Date Written: May 27, 2016

Abstract

A decision to buy an item at a regular price or wait for a possible markdown involves a multi-dimensional trade-off between the value of the item, the delay in getting it, the likelihood of getting it, and the magnitude of the price discount. Such trade-offs are prone to behavioral anomalies by which human decision makers deviate from the discounted expected utility model. We build an axiomatic preference model that accounts for three well-known anomalies, and produces a parsimonious generalization of discounted expected utility. We then plug this behavioral model into a Stackelberg-Nash game between a firm that decides the price discount and a continuum of consumers who decide to wait or buy, anticipating other consumers' decisions and the resultant likelihood of product availability. We solve the markdown management problem and contrast the results of our model with those under discounted expected utility. We analytically show that accounting for the behavioral anomalies can result in larger markdowns and higher revenues. Finally, we calibrate our model via a laboratory experiment, and validate its predictions out-of-sample.

Keywords: Retail Operations, Markdown Management, Probability and Time Tradeoff, Behavioral Anomalies, Behavioral Operations

Suggested Citation

Baucells, Manel and Osadchiy, Nikolay and Ovchinnikov, Anton, Behavioral Anomalies in Consumer Wait-or-Buy Decisions and Their Implications for Markdown Management (May 27, 2016). "Behavioral Anomalies in Consumer Wait-or-Buy Decisions and Their Implications for Markdown Management" Manel Baucells, Nikolay Osadchiy, Anton Ovchinnikov. Operations Research, 2016, DOI: org/10.1287/opre.2016.1547 . Available at SSRN: https://ssrn.com/abstract=2516574 or http://dx.doi.org/10.2139/ssrn.2516574

Manel Baucells

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Nikolay Osadchiy

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322
United States

HOME PAGE: http://www.bus.emory.edu/nosadch/

Anton Ovchinnikov (Contact Author)

Queen's School of Business ( email )

143 Union Street
Kingston, ON K7L3N6
Canada

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