Selling to Strategic Consumers When Product Value Is Uncertain: The Value of Matching Supply and Demand

We address the value of quick response production practices when selling to a forward-looking consumer population with uncertain, heterogeneous valuations for a product. Consumers have the option of purchasing the product early, before its value has been learned, or delaying the purchase decision until a time at which valuation uncertainty has been resolved. Whereas individual consumer valuations are uncertain ex ante, the market size is uncertain to the firm. The firm may either commit to a single production run at a low unit cost prior to learning demand, or commit to a quick response strategy that allows additional production after learning additional demand information. We find that the value of quick response is generally lower with strategic (forward-looking) customers than with nonstrategic (myopic) customers in this setting. Indeed, it is possible for a quick response strategy to decrease the profit of the firm, though whether this occurs depends on various characteristics of the market; specifically, we identify conditions under which quick response increases profit (when prices are increasing, when dissatisfied consumers can return the product at a cost to the firm) and conditions under which quick response may decrease profit (when prices are constant or when consumer returns are not allowed). <i>This paper was accepted by Martin Lariviere, operations and supply chain management.</i>