Are Consumers Really Strategic? Implications from an Experimental Study

Abstract

In the wake of recent literature on revenue management with strategic consumer behavior, we report the results of a new experimental study. The experiment considers the strategic and bargain-hunting behavior of decision makers faced with buy-now vs. wait decisions, in a retail markdown pricing context. We test whether the consumer behavior is consistent with the discounted expected utility model (DEU), or with its modified version that accounts for the individual perception of risk associated with the wait option. After controlling for risk perceptions, we find that 77% of subjects are forward-looking, and 36% of them correctly perceive the future availability risk. In addition, more subjects adopt the forward-looking strategy if they are explicitly given the probability of obtaining the item in the wait option. However, if only a proxy for the probability of availability is provided, 26% of subjects underestimate the risk. Such bargain-hunting behavior can hinder efficiency of price discrimination and adversely impact retailers' revenue. The impact can be mitigated by providing consumers with the future item availability information. We estimate the benefit of such efforts to be approximately 2.6% of revenue.

Keywords: Experimental study, Consumer behavior, Revenue management