Price Protection with Consumer’s Policy Behavior

Abstract

Selling seasonal usually can be divided into two stages by retailers, one of which is the merchandise is sold at a regular price during the regular period and the other is the merchandise sold at a lower price in the discounted period. The price in the discounted period is often lower than the cost price in order to reduce the inventory, which results in a decrease in the profit earned by retailers. Therefore, retailers should take some steps to improve this situation. This paper studies how the price protection strategy carried by retailers influence the retail price, the optimal quantity and profit when the strategic consumers and uncertain demands exist. Price protection is a kind of rebate that the retailer offer consumers price discount when price drops during the selling season, there are three alternative strategies for retailers: no price protection policy, partial price protection policy, full price protection policy. The optimal price and order quantity for retailers are analyzed based on rational exception equilibrium theory for each policy. The result shows that price protection strategies can improve the profitability of retailers, and the full price protection policy is the optimal one.