Implications of Consumer Behavior in Retail Operations

Consumers have become increasingly sophisticated along multiple dimensions. For example, they may consider whether and when to purchase from a firm based on current and future prices and product availability. Notably, empirical evidence suggests that a significant fraction of consumers do not visit firms that experience frequent stock outs and may postpone their purchase with the hope of paying a lower price in the clearance period. Additionally, consumers also consider product design in their valuation for the product, and are only willing to pay premium prices for products that match design trends and retain value during the product’s lifecycle. In such an environment, retailers should include elements of consumer behavior in their pricing, inventory, channel (e.g. online and offline), and fashion design decisions. In three essays, we address each of these managerial decisions with the aim of helping retailers to understand and control different elements of consumer behavior while providing a better shopping experience for their consumers. In the first essay, we focus on pricing strategies of a firm that implements multiperiod pricing and answer whether consumers necessarily benefit from strategic behavior (timing their purchase) when the firm optimally responds to this type of behavior. We find that many consumers have a lower surplus if they are strategic than if they are myopic. We then develop a model in which consumers choose to become strategic by exerting costly effort, and find that it is possible to increase firm profit, consumer, and social welfare simultaneously by increasing the cost of strategic behavior. In the second essay, considering a product with a decreasing price path, we study how inventory and channel integration impacts whether and when consumers visit the firm by affecting product availability. We show that integration generates value by increasing regular period availability and encouraging more consumers to visit the firm, but it may also harm the firm by encouraging more consumers to delay their purchases. In the third essay, we study joint design, pricing, and inventory decisions of firms facing consumers that have a low valuation for products that are out of style and rapidly lose value during the selling season. We illustrate that firms that implement dynamic pricing should carefully consider the interdependence between their inventory and design decisions. In sum, our findings in this dissertation shed light on the importance of considering implications of consumer behavior in retail operations and provide solutions that benefit firms and consumers.