High price or low price? An experimental study on a markdown pricing policy

Abstract This study examines whether strategic customers’ behavioral patterns remain consistent in different pricing scenarios under a markdown pricing policy. These customers’ decision patterns have been widely discussed because they significantly influence the expected monetary output. Contrary to rational assumptions, the behavioral research literature indicates that customers’ behavioral biases manifest in their reference dependency, risk and loss attitudes, and fill rate misperceptions. However, the relationship between behavioral biases and various pricing scenarios has not been carefully examined; accordingly, we conducted laboratory experiments to observe customers’ behavioral performance in a series of pricing scenarios to provide pricing suggestions for sellers. Our experimental results demonstrate that behavioral factors reflecting risk and loss attitudes as well as reference dependency can clearly describe customers’ behavioral biases. Meanwhile, our estimation shows that the degrees of risk and loss attitude are not constant, but depend on price settings: the lower the full price in the initial period, the higher the degrees of aversion to both risk and loss. Given such behavioral patterns, we suggest that sellers should set their full prices lower than the normative value when the fill rate in period two is low, and set them higher than the normative value when the fill rate in period two is high.