Markdowns and Buying Frenzies with Conspicuous Consumers

Luxury and markdowns are, in many respects, contradictory concepts. Several luxury retailers adopt markdowns to increase sales (i.e., sales effect). However, most consumers purchasing luxury products desire exclusivity, and markdowns decrease their willingness to pay by decreasing product exclusivity (i.e., snob effect). They also encourage strategic (forward-looking) consumers to wait for lower prices (i.e., strategic effect). To study the impact of these three countervailing effects on a luxury retailer’s markdown policy and rationing strategy (i.e., inducing buying frenzy or selling deliberately less than the demand), this paper develops a game-theoretic model with strategic and exclusivity-seeking consumers who have heterogeneous (high and low) valuations. We characterize a luxury retailer’s equilibrium pricing and rationing strategies and show that its markdown policy depends on consumers’ desire for exclusivity only when the proportion of consumers with high valuation is not too high or too low. Interestingly, we find that, in such cases, consumers’ higher desire for exclusivity does not induce the retailer to increase exclusivity and to adopt uniform pricing. To the contrary, it motivates the retailer to decrease the exclusivity and to adopt markdowns. We also show that consumers’ higher desire for exclusivity always leads to buying frenzies. By doing so, we identify conspicuous consumer behavior as another rationale behind markdowns and buying frenzies. Lastly, we find that conspicuous consumer behavior curbs the negative impact of strategic consumers, and yet, ignoring strategic consumer behavior can be more costly when selling to conspicuous consumers.