Pricing and Inventory Decisions Facing Strategic Customers with Behavioral Preferences

The authors consider a two-period joint inventory and pricing decision problem for a retailer facing strategic customers with behavioral preferences such as reference dependence, loss aversion and risk preferences. The authors develop and analyze a model that accounts for customers' these behavioral preferences as well as value depreciation on the product, and makes predictions on the retailer's optimal decisions. Moreover, the authors demonstrate how the presence of these behavioral preferences and primary parameters will leverage the retailer's optimal decisions. It is revealed that strategic customers' loss aversion behavior could benefit the retailer from pushing up the regular price, the stocking quantity and hence the expected profit. However, customer's value depreciation on the product will drive down these aspects. To alleviate the negative effect of the strategic customers' behavioral preferences, the authors suggest the retailer applying inventory commitment strategy and price guarantee policy, which could increase the retailer's profit beyond the rational expectation equilibrium level in some situations.