Quick response under strategic consumers with risk preference and decreasing valuation

Abstract

This paper addresses the impact of the quick response (QR) strategy on the profit of a retailer that sells a product to strategic consumers with risk preference and decreasing valuation, and makes pricing and order quantity decisions. We find that the optimal pricing and expected profit decrease in consumers’ risk preference and valuation decreasing rate, and the optimal inventory is unrelated to them. The effect of the QR strategy depends on the QR cost, consumers’ risk preference, and valuation decreasing rate. When the QR cost is low, the QR strategy can mitigate strategic consumers’ behaviour and bring profit to the retailer. Otherwise, the QR strategy may further reduce the retailer’s expected profit and intensify the negative effect of strategic consumers’ behaviour. The profit brought by the QR strategy decreases in consumers’ risk preference and valuation decreasing rate. Furthermore, we consider the case involving heterogeneous strategic consumers. We find that the proportion of high-valuation consumers in the market has an impact on the optimal decisions of the retailer and the effect of the QR strategy. The more high-valuation consumers there are, the greater is the profit brought by the QR strategy.

Keywords:

• newsvendor problem
• strategic consumer
• quick response
• behavioural operations management
• consumers’ risk preference

Acknowledgements

We thank the editor and reviewers for their good comments and suggestions, which help us significantly improve the paper.

Notes

1. http://tech.sina.com.cn/i/2016-11-12/doc-ifxxsmic6065504.shtml

2. Here we use the Arrow-Pratt measure of absolute risk aversion, which is defined as at x, to measure the degree of risk aversion. Specifically, corresponds to risk aversion, corresponds to risk seeking and corresponds to risk neutrality. A large corresponds to more risk aversion. Note that , which is a decreasing function in for a given x; when , we have the conclusions.

3. The available probability ξ_prob is determined by the retailer’s order quantity. Here we assume that the consumers can correctly anticipate it. This assumption is used in many papers, e.g. Liu and van Ryzin (2008), Su and Zhang (2008), and Cachon and Swinney (2011).