Operational implications of strategic consumer behavior

This dissertation addresses the impact of strategic customer purchasing behavior on the value operational flexibility. Strategic customers anticipate future purchasing opportunities for a product (e.g., at a lower price during a sale, or at some time at which better information about the product is known) and choose to purchase at the time which gives them greatest utility. We consider two types of operational flexibility: production flexibility (the ability to rapidly produce inventory in order to match uncertain demand during a selling season) and design flexibility (the ability to quickly modify product design to suit changing consumer trends), both of which are of particular relevance to the fashion apparel industry. To analyze the impact of strategic behavior on such flexibility, we create theoretical models in which a firm (that chooses inventory levels and prices) plays a game against a strategic customer population (wherein each consumer chooses when to purchase the product). Our results are presented in three parts. In the first part, we focus on the value of production flexibility when selling a product that declines in price over two periods to a strategic customer population of uncertain size with heterogeneous valuations for the good. In the second part, we consider the value of production flexibility when selling a good at a constant price for which consumers possess uncertain value. In the third part, we consider the value of design flexibility when selling a product that declines in price to consumers with known value for the good, and we examine the differences between design flexibility and production flexibility in influencing consumer purchasing behavior. We find that operational flexibility of either type generally benefits the firm when consumers behave strategically (though this is not always the case), and in fact the value of flexibility is typically greater when consumers are strategic than when they are non-strategic