389 / 2024-04-24 21:45:32

Markdown or Everyday Low Price? The Role of Taste Projection Among Strategic Consumers

markdown price,everyday low price,strategic consumer,projection bias

Consumers often exaggerate the degree to which others' tastes resemble their own, a phenomenon called taste projection (TP). This paper explores the impact of TP on consumers' beliefs, market demand, and the optimal pricing strategy for a monopolist selling a fixed quantity of products over two periods. The seller can commit to a markdown pricing path while consumers strategically time their purchases. In the absence of TP, the seller always prefers the everyday low price scheme in our model. However, TP leads to discrepant perceptions of product availabilities across consumers. We show that, under TP, (i) markdown pricing is optimal when both TP and capacity level are small or TP level is large, (ii) the profit is weakly increasing in the extent of TP but nonmonotonic with the capacity level, and (iii) consumer surplus can be higher than that under rational behavior, resulting in a win-win outcome for the seller and consumers.