Decision Sciences · 2020 · 18 citations · 47 references
Consumer UncertaintyInventory TheoryConsumer ResearchMarket DesignPricingOperations ResearchPricing PolicySearch CostsManagementSupply ChainNaive Pricing StrategyQuantitative ManagementDynamic PricingPricing StrategyPrice FormationMarket BehaviorMarketingFinanceRevenue ManagementBusinessRegression Pricing Strategy
During supply disruptions, firms seek pricing strategies to mitigate losses but lack precise insight into short‑term customer responses. The study investigates the impact of heuristic pricing strategies on customer order variability and firm profit during supply disruptions. The authors compare fixed, naive, one‑period correction, and regression pricing strategies. The analysis shows that while fixed pricing stabilizes orders, it yields lower profit than naive pricing; one‑period correction and regression strategies produce higher variability and lower profit, and the study concludes that eliminating variability is inadvisable and that price adjustments matching supply to demand improve profit, with findings robust to inventory assumptions and objectives.
ABSTRACT When supply disruptions occur, firms want to employ an effective pricing strategy to reduce losses. However, firms typically do not know precisely how customers will react to price changes in the short term, during a disruption. In this article, we investigate the customer's order variability and the firm's profit under several representative heuristic pricing strategies, including no change at all (fixed pricing strategy), changing the price only (naive pricing strategy), and adjusting the belief and price simultaneously (one‐period correction [1PC] and regression pricing strategies). We show that the fixed pricing strategy creates the most stable customer order process, but it brings lower profit than the naive pricing strategy in most cases. The 1PC pricing strategy produces a more volatile customer order process and smaller profit than the naive one does. Although the regression pricing strategy is a more advanced approach, it leads to lower profit and greater customer order variability than the naive pricing strategy (but the opposite when compared to the 1PC strategy). We conclude that (i) completely eliminating the customer order variability by employing a fixed pricing strategy is not advisable and adjusting the price to match supply with demand is necessary to improve the profit; (ii) frequently adjusting the belief about customer behaviors under imperfect information may increase the customer's order variability and reduce the firm's profit. The conclusions are robust to the inventory assumption (i.e., without or with inventory carryover) and the firm's objective (i.e., market clearance or profit maximization).
47