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Designing Optimal Preannounced Markdowns in the Presence of Rational Customers with Multiunit Demands

Wedad Elmaghraby, Altan Gülcü, Pnar Keskinocak

R. H. Smith School of Business, University of Maryland, College Park, Maryland 20742
H. Milton Stewart School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, Georgia 30332, and SAS Institute Inc., Cary, North Carolina 27513
H. Milton Stewart School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, Georgia 30332
wedad_elmaghraby{at}rhsmith.umd.edu
altan{at}isye.gatech.edu
altan.gulcu{at}sas.com
pinar{at}isye.gatech.edu

We analyze the optimal design of a markdown pricing mechanism with preannounced prices. In the presence of limited supply, buyers who choose to purchase at a lower price may face a scarcity in supply. Our focus is on the structure of the optimal markdown mechanisms in the presence of rational or strategic buyers who demand multiple units. We first examine a complete information setting where the set of customer valuations is known but the seller does not know the valuation of each individual customer (i.e., cannot exercise perfect price discrimination). We then generalize our analysis to an incomplete valuation information setting where customer valuations are drawn from known distributions. For both settings, we compare the seller's profit resulting from the optimal markdown mechanism and the optimal single price. We provide a number of managerial insights into designing profitable markdown mechanisms.

Key Words: pricing; markdown; strategic bidding; price discrimination
History: Received: June 20, 2004; accepted: December 23, 2006.

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