Determining Optimal Markdown Pricing for Remaining Inventory: The Role of Customer Regret

We study the optimal markdown pricing of seasonal products like apparel, in the presence of customer anticipated regret. Building on previous research, we quantify markdown demand and reservation price, and integrate the effects of high-price and stockout regret into the optimal markdown pricing model. We model a regret-prone customer’s purchase decision using a utility based economic model and estimate the parameters of this model with data obtained from a brick-and-mortar apparel retailer. Our analysis shows that considering customer regret in the pricing decision during markdown season for apparel can bring an advantage to the retailer and increase in expected revenues. Our results highlight the importance of assessing the relative strength of regret and accounting for these factors in designing effective markdown pricing strategies. We conclude by discussing the implications of the research and suggest future research directions.