The Discounting Strategy for Long-Term Profitability with a Consideration of Perceived Quality
Date Issued
2015
Date
2015
Author(s)
Chen, Chia-Hao
Abstract
As one of the most well-recognized price promotion activities, discounts have been widely used by all kinds of sellers. Discounts increase the sales by reducing the price of a product/service and directly increase the short-term profit. However, once the price becomes lower, customers who are uncertain about the reason may have a quality concern about the product. Previous studies have shown that discounts may deteriorate a customer’s perceived value to a product/service and cause negative consequences for the long-term profit. This then reduces the perceived quality of the product and poses potential loss for future profits. In this thesis, we investigate the long-term profitability of a discounting strategy. By taking into consideration the impact of discounts on perceived quality, we try to realize under what circumstances a discount-offering strategy is indeed an instrument to benefit sellers. To conduct our research, a game-theoretic model is proposed to describe the players, the actions, and the interaction between a seller and customers. Nonlinear optimization is used to analytically solve for equilibria, identify the optimal discounting strategies, and analyze the results. Furthermore, some numerical studies are conducted to verify the results and extract some more intrinsic insights. Our research finds that a product’s original price and its true quality serve important roles in a seller’s discounting strategy. When a product’s original price is close enough to reflect its true quality, a discounting strategy could be beneficial; otherwise, offering a discount could be harmful. Moreover, we show that the sensitivity for customers to a price reduction acts as a vital role in a seller’s decision as well.
Subjects
Discount/Price promotion
Perceived quality/Perceived value
Long-term profitability
Nonlinear optimization
Revenue management
Type
thesis
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ntu-104-R02725018-1.pdf
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