13.3 MarkdownsAssumptioninexample:demandisdeterministicbased on priceRealisticpictureDemandisrandomAtthe endof a selling season,theremayberemaininginventory·Firmsfrequentlyemploya markdown orsaletodisposeexcessinventoryThinkabout demand fromthe customer'sperspective:Eachcustomer hasa maximumprice thatheorshe iswilling topayfortheproductReservationprice13-11
13-11 13.3 Markdowns Assumption in example: demand is deterministic based on price Realistic picture Demand is random At the end of a selling season, there may be remaining inventory Firms frequently employ a markdown or sale to dispose excess inventory Think about demand from the customer’s perspective: Each customer has a maximum price that he or she is willing to pay for the product Reservation price
Markdown ConceptWhenthep=$1,200,D=400400 customers havea reservation price ator above $1200Whenthepriceisbelowtheirreservationprice,theywill buyThelower the price,the morecustomers with areservationpriceat or abovethat priceSell producttocustomers whose reservationprices were below the original price, but abovethesalepriceTraditionally,retailers have tried to avoidmarkdownsEvidenceofmistakesinpurchasing,pricing,ormarketingLow reservation price customers seen as:lessdesirableorprofitable1useful to get rid of the excess inventory13-12
13-12 Markdown Concept When the p=$1,200, D=400 400 customers have a reservation price at or above $1200 When the price is below their reservation price, they will buy The lower the price, the more customers with a reservation price at or above that price Sell product to customers whose reservation prices were below the original price, but above the sale price. Traditionally, retailers have tried to avoid markdowns Evidence of mistakes in purchasing, pricing, or marketing Low reservation price customers seen as: less desirable or profitable, useful to get rid of the excess inventory