Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis

Posted: 24 Oct 2012

See all articles by Gonca Soysal

Gonca Soysal

University of Texas at Dallas, Naveen Jindal School of Management; University of Arkansas - Sam M. Walton College of Business

Lakshman Krishnamurthi

Northwestern University

Date Written: 2012

Abstract

This study develops and estimates a dynamic model of consumer choice behavior in markets for seasonal goods, where products are sold over a finite season and availability is limited. In these markets, retailers often use dynamic markdown policies in which an initial retail price is announced at the beginning of the season and the price is subsequently marked down as the season progresses. Strategic consumers face a trade-off between purchasing early in the season, when prices are higher but goods are available, and purchasing later, when prices are lower but the stockout risk is higher. If the good starts providing utility as soon as it is purchased (e.g., apparel), consumers purchasing earlier in the season can also get more use from the product compared to those purchasing later.

Our structural model incorporates three features essential for modeling the demand for seasonal goods: changing prices, limited availability, and possible dependence of total consumption utility on the time of purchase. In this model, heterogeneous consumers have expectations about future prices and product availability, and they strategically time their purchases. We estimate the model using aggregate sales and inventory data from a fashion goods retailer.

The results indicate that, in the fashion goods context, ignoring consumers' expectations about future availability or the change in total consumption utility over the season can lead to biased demand estimates. We find that strategic consumers delay their purchases to take advantage of markdowns and that these strategic delays hurt the retailer's revenues. Retailer revenues facing strategic consumers are 9% lower than they would have been facing myopic consumers. Limited availability, on the other hand, reduces the extent of strategic delays by motivating consumers to purchase earlier. We find that the impact of strategic delays on retailer revenues would have been as high as 35% if there were no stockout risk. By means of counterfactual experiments, we show that the highest retailer profits are achieved by offering small markdowns early in the season. On the other hand, given current markdown percentages, the retailer can improve profits by carrying less stock as consumers accelerate purchases and purchase at higher prices when they anticipate scarcity in future periods. As long as the reduction in availability is not great, the profit gain from earlier higher-priced sales can overcome the loss resulting from the reduction in overall sales.

Keywords: pricing research, choice models, forward-looking behavior, limited availability, short life cycle, fashion, retailing, revenue management

Suggested Citation

Soysal, Gonca and Soysal, Gonca and Krishnamurthi, Lakshman, Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis (2012). Marketing Science, Vol. 31, No. 2, 2012; pp. 293-316; DOI: 10.1287/mksc.1110.0693, Available at SSRN: https://ssrn.com/abstract=2160865

Gonca Soysal (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Lakshman Krishnamurthi

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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