Clearance sale or not? Benefits from multi-behavioral factors of strategic customers

Abstract

We consider a seller’s decision problem when facing a stochastic number of customers who are strategic. The seller first determines a strategy of either clearance sale or fixed price, and then stocks the corresponding quantity of products to maximize profit. Because customers potentially face a shortage if they wait for a discount, behavioral factors arise. Derived from prospect theory, risk aversion, reference point, and loss aversion are considered to capture the behavior of strategic customers. We investigate the behavioral impacts and find that customers’ loss aversion always benefits the seller who chooses a clearance sale strategy, but risk aversion does not. The seller should also consider the cost of the product (or profit margin) to choose either a clearance sale or fixed-price. From the result of numerical analysis, the potential profit improvement from considering behavioral factors can be as high as 18.55% and is affected by the product cost and the discount rate. Furthermore, we point out that inaccurately estimating the behavioral factors may result in great profit losses, but when the product cost is high or the product cost is moderate with a high discount rate, a seller need not worry about the inaccuracy because it causes limited profit consequences.