UCL School of Management is delighted to welcome Nick Petruzzi, Penn State, to host a research seminar discussing ‘Nobody pays retail anymore: Optimal pricing in distribution channels with bargain-hunting consumers’.
We study optimal retail pricing for a stylized distribution channel in which a single product is sold to a market characterized by bargain-hunting consumers, where bargain hunting is a notion that refers to the propensity of some consumers to extract psychological beneﬁt from the purchase of a given item that is posted at a discounted price. In particular, we derive a price and discount dependent retail demand function from ﬁrst principles by developing a consumer utility function that incorporates both economic and psychological utility eﬀects associated with a posted selling price that is explicitly discounted from a posted list price. Within that context, we analytically explore the retailer’s trade-oﬀ between posting a selling price without an accompanied list price and posting a selling price that is coupled with, and explicitly discounted from, a higher list price, and we determine the retailer’s optimal one-point versus two-point pricing strategy accordingly. We then analyze the eﬀects of wholesale pricing, manufacturer suggested retail pricing, and demand uncertainty on the optimal strategy and corresponding split of channel proﬁts.