Strategic Management of Distressed Inventory

It is well known that maximizing revenue from a fixed stock of perishable goods may require discounting prices rather than allowing unsold inventory to perish. This behavior is seen in industries ranging from fashion retail to tour packages and baked goods. A number of authors have addressed the markdown management problem in which a seller seeks to determine the optimal sequence of discounts to maximize the revenue from a fixed stock of perishable goods. However, merchants who consistently use markdown policies risk training customers to “wait for the sale.” We investigate models in which the decision to sell inventory at a discount will change the future expectations of customers and hence their buying behavior. We show that, in equilibrium, a single-price policy is optimal if all consumers are strategic and demand is known to the seller. Relaxing any of these conditions can lead to a situation in which a two-price markdown policy is optimal. We show using numerical simulation that if customers update their expectations of availability over time, then optimal sales limit policies can evolve in a complex fashion.