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Operations strategies with snobbish and strategic consumers

Author

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  • Chang Hwan Lee
  • Tsan‐Ming Choi
  • T. C. Edwin Cheng
Abstract
Studying the optimal production and pricing strategies of a luxury brand manufacturer (in this paper, the “manufacturer” is in fact also the “retailer”), we consider the following situation. First, consumers exhibit a prestige‐seeking (snobbish) behavior that values product exclusivity. Their utility decreases as more consumers possess the product. Second, consumers show a forward‐looking (strategic) behavior. They make shop visit decisions based on predicted product availability. Third, the manufacturer's production policy is unobservable to consumers. Given these basic premises, we consider a traditional newsvendor inventory system and analytically derive the equilibrium production and pricing strategies within the rational expectation framework. We then propose two improvement strategies, each using a well‐established channel policy, to steer the game participants to reach a better equilibrium than the one for the traditional system. First, under the limited edition strategy with consumer returns, the firm uses the consumer return policy as a proxy for the limited edition strategy that aims to increase product exclusivity. Second, under the product line extension strategy, the firm applies product line extension as a means to guide the game participants to simultaneously increase product availability and product exclusivity. Finally, we extend the study by incorporating a variety of modeling variations and examine robustness of the research findings.

Suggested Citation

  • Chang Hwan Lee & Tsan‐Ming Choi & T. C. Edwin Cheng, 2021. "Operations strategies with snobbish and strategic consumers," Naval Research Logistics (NRL), John Wiley & Sons, vol. 68(3), pages 327-343, April.
    • Handle: RePEc:wly:navres:v:68:y:2021:i:3:p:327-343
    DOI: 10.1002/nav.21955
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    References listed on IDEAS

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