A Bargain Hunter's Paradox

How a great deal for one shopper can drive up prices for everyone

May 27, 2020
Operations

 

Have you ever wanted to buy something, but waited patiently until it went on sale? Studies show that up to one third of customers shop strategically for the best deals. 

But new research from Robert Swinney, an operations professor at Duke University’s Fuqua School of Business, shows that this smart shopping strategy may not actually be so smart. 

In fact, by finding hot deals, bargain hunters could indirectly drive up prices for themselves and others, Swinney and co-authors demonstrate in forthcoming paper in the journal Operations Research.

“These days, there's just a lot more information and ability for consumers to strategically time their purchasing decisions,” Swinney said. “Especially with something like fashion apparel, people know that the sales are dictated by the seasons, so in January or February, there are going to be clearance sales on winter sweaters, and people know this, so it’s easy for them to anticipate these sales. There’s empirical evidence that somewhere between 10 and 30 percent of consumers, depending on industry context, are going to behave this way.”

The problem is, when customers delay purchases while waiting for discounts they are, in turn, curbing a company’s profits, forcing those companies to use new strategies to outsmart these bargain hunters, Swinney explained.
One strategy in particular is lowering the initial price on a product and stocking less of it so that there won’t be as many left over at clearance time. 

For example, that $100 sweater a customer has his eye on may be marked down – but not immediately after Christmas to $40, as shoppers might have seen in the past. 

Instead, the sweater might start at a lower price – maybe $80 – then drop to $50 on clearance. This could push customers to buy earlier at a higher price, especially when they see that stock is low or their size is running out.

“This strategy will temper those incentives of consumers to wait for discounts, if you give them better deal today and don’t lower the price too much when it goes on sale,” he said. 

Unfortunately for consumers, this pricing strategy can leave them worse off, because they’re either paying more for a product, or are simply not buying it at all, Swinney said. 

But if firms use and stick to this strategy, they have the potential to change consumers’ habits in the long run, which could actually provide some benefit, he explained.

As customers have a harder time predicting sales or finding huge markdowns, many will simply stop trying to find those deep discounts. Once they back off, companies will see more profits and then could be more likely to consider bigger discounts in the future.

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