A price adjustment policy for maximizing revenue and countering strategic consumer behavior

• DOI: 10.1016/j.ijpe.2021.108116
• Publication Date: 2021-03-29T05:42:12Z
• Authors: Moutaz Khouja; Xin Liu
• Keywords: 0211 other engineering and technologies; 02 engineering and technology; 12. Responsible consumption

Abstract Most retailers offer a price adjustment protection policy. With this policy, if the retailer discounts the product, then time-eligible consumers who paid the regular price can apply and get a refund of the price difference. We show that for perishable products and a given order quantity and demand realization, offering price adjustment protection will not decrease the revenue of the retailer. Also, when consumers behave strategically, offering price adjustment protection increases the revenue of the retailer. We also examine the optimal duration of the price adjustment protection together with the optimal price markdown time. Our analysis shows that for a given order quantity, offering a price adjustment protection will leave revenue unchanged for low realizations of demand, will increase revenue for high realizations of demand, and will decrease revenue in the mid range of demand realization. Price adjustment protection has a larger positive effect on revenue when the proportion of strategic consumers is high and that effect is further increased when more of them exhibit optimistic behaviour.