Omni-channel retail operations in the presence of strategic customers: The benefit of inventory commitment

Abstract

This paper studies the impact of strategic customer behavior on retailers’ omni-channel strategies. Customers in the market are classified into strategic omni-channel customers and myopic B&M (brick and mortar) store customers. The retailer firstly charges a full price but will then salvage the leftover inventory at a lower price (markdown policy) for strategic omni-channel customers after the customers’ demand is realized. The strategic omni-channel customers choose purchase timing to maximize their own expected profit. While, the myopic B&M store customers do not choose purchase timing. By characterizing rational expectation equilibrium, we find that the inventory level under markdown policy is higher than that in the classic model where no markdown policy is implemented. Also, the policy will transfer more strategic customers to the online channel to buy at full price so that the retailer will benefit from it. Besides, inventory commitment policy can further increase retailer’s profit based on markdown policy. In addition, we extend the model to the supply chain and present the contrasting view that the total profit of the decentralized supply chain under the wholesale price contract is higher than that of the centralized supply chain. The influence of strategic customer behavior and system parameters on the retailer’s optimal decision is discussed through numerical study.