This research will study the impact of strategic consumer behavior on operations management. Consumers today often look for the best deals. For example, when shopping for fashion apparel, they may wait for end-of-season sales, and when buying household products, they may stock up during price promotions. If unaccounted for, such behavior generates economic inefficiencies: firms lose revenues and consumers may find their desired products unavailable. This project aims to perform the following tasks. 1) Develop models to help firms optimize their pricing and inventory decisions when facing strategic consumers. 2) Provide general principles that help consumers make decisions such as when to buy and how much to buy. 3) Understand how strategic consumer behavior will influence contractual relationships between supply chain partners. 4) Study consumer psychology in operational settings and explore the impact of consumer decision errors on firms' profits and social welfare. The analysis will utilize techniques from game theory, dynamic optimization, stochastic modeling, statistics, as well as concepts from psychology and behavioral economics.
The research involves broader impacts beyond its contribution to the theoretical operations research literature. First, the research will be integrated with educational goals. Results and insights will be incorporated into teaching materials for MBA and PhD courses. Experiential exercises (classroom games and simulations) will be designed for students to gain first-hand experience in related decision problems. Research opportunities will be provided for undergraduate and graduate students. Second, this project is expected to have substantial practical impact. Research results will help shape a new generation of operations management software tools that explicitly measure and account for strategic consumer behavior, and will also provide decision-aids to guide consumer decision-making. This will enhance social welfare by creating a win-win situation for both consumers and firms.
This project has studied the impact of consumer behavior on operations management. Operations management is about how to match supply and demand in a world with supply inflexibility and demand unpredictability: anticipating demand before-hand is difficult and shifting supply over locations or time afterward is costly. In this project, we advocate the view that customers are strategic: they will adapt their purchasing behavior in response to firms’ operational strategies. Consequently, firms that seek to maximize efficiency have to incorporate strategic customer behavior into their business operations. We summarize our main results with the following lessons. Customers are often trained to wait for sales. Firms routinely slash prices at the end of a selling to dispose of excess inventory. Instead, firms can explore alternative strategies such as returning them to suppliers or limiting initial quantities. Such supply chain strategies can encourage customers to buy at full price. Customers like to visit stores where they know that their desired products are in stock. Sometimes it may be too expensive to simply hold large quantities of inventory. In such cases, firms can offer availability guarantees to attract patronage. Customers value the option to change their minds after purchase. This has led to a wide variety of returns policies in practice. However, full refunds are too generous. More efficient alternatives include charging restocking fees and negotiating with suppliers to share the burden of customer returns. Customers tend to stock up during periodic promotions. This is inefficient when the firm holds inventory more cheaply. The alternative pricing strategy is everyday-low-pricing, which we find is more profitable when occasional shoppers (such as impulse buyers) are willing to pay more than regular shoppers. Customers sometimes engage in speculation and buy products for resale on online platforms. This creates additional speculative demand and may lead to high resale prices. Although speculators seek profits for themselves, they generate scarcity that increases profits for firms. The above research has been integrated into educational activities. At the undergraduate level, we have developed experiential exercises (classroom games and simulations), which provide students with first-hand experience dealing with related decision problems. At the doctoral level, the above research results have been incorporated into inter-disciplinary doctoral research seminars. At the individual student level, this project has provided research experience for undergraduate and masters students as well as training and development for doctoral students.
