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- Publisher Website: 10.1287/msom.2017.0634
- Scopus: eid_2-s2.0-85032004657
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Article: When customers anticipate liquidation sales: Managing operations under financial distress
Title | When customers anticipate liquidation sales: Managing operations under financial distress |
---|---|
Authors | |
Keywords | Deferred discount Strategic customers Store credit Rebate Pricing Liquidation sale Inventory Financial distress |
Issue Date | 2017 |
Citation | Manufacturing and Service Operations Management, 2017, v. 19, n. 4, p. 657-673 How to Cite? |
Abstract | © 2017 INFORMS. The presence of strategic customers may force an already financially distressed firm into a death spiral: sensing the firmâs financial di culty, customers may wait strategically for deep discounts in liquidation sales. In turn, such waiting lowers the firmâs profitability and increases the firmâs bankruptcy risk. Using a two-period model to capture these dynamics, this paper identifies customersâ strategic waiting behavior as a source of a firmâs cost of financial distress. We also find that customersâ anticipation of bankruptcy can be self-fulfilling: when customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when customers anticipate a low probability of bankruptcy. Such behavior has important operational and financial implications. First, the firm acts more conservatively when facing either more severe financial distress or a large share of strategic customers. As its financial situation deteriorates, the firm lowers inventory alone when financial distress is mild or only a small share of customers are strategic and lowers both inventory and price in the presence of severe financial distress and a large fraction of strategic customers. Under optimal price and inventory decisions, strategic waiting accounts for a large part of the firmâs total cost of financial distress, although a larger proportion of strategic customers may result in a lower probability of bankruptcy. In addition to inventory reduction and (immediate) price discount, we find that a deferred discount, in the form of rebates and/or store credits for future purchases, can act as an e ective mechanism to mitigate strategic waiting. As a contingent price reduction, deferred discounts align the interests of customers and the firm and are most e ective when the fraction of strategic customers is high and the firmâs financial distress is at a medium level. |
Persistent Identifier | http://hdl.handle.net/10722/251283 |
ISSN | 2023 Impact Factor: 4.8 2023 SCImago Journal Rankings: 5.466 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Birge, John R. | - |
dc.contributor.author | Parker, Rodney P. | - |
dc.contributor.author | Wu, Michelle Xiao | - |
dc.contributor.author | Yang, S. Alex | - |
dc.date.accessioned | 2018-02-01T08:43:03Z | - |
dc.date.available | 2018-02-01T08:43:03Z | - |
dc.date.issued | 2017 | - |
dc.identifier.citation | Manufacturing and Service Operations Management, 2017, v. 19, n. 4, p. 657-673 | - |
dc.identifier.issn | 1523-4614 | - |
dc.identifier.uri | http://hdl.handle.net/10722/251283 | - |
dc.description.abstract | © 2017 INFORMS. The presence of strategic customers may force an already financially distressed firm into a death spiral: sensing the firmâs financial di culty, customers may wait strategically for deep discounts in liquidation sales. In turn, such waiting lowers the firmâs profitability and increases the firmâs bankruptcy risk. Using a two-period model to capture these dynamics, this paper identifies customersâ strategic waiting behavior as a source of a firmâs cost of financial distress. We also find that customersâ anticipation of bankruptcy can be self-fulfilling: when customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when customers anticipate a low probability of bankruptcy. Such behavior has important operational and financial implications. First, the firm acts more conservatively when facing either more severe financial distress or a large share of strategic customers. As its financial situation deteriorates, the firm lowers inventory alone when financial distress is mild or only a small share of customers are strategic and lowers both inventory and price in the presence of severe financial distress and a large fraction of strategic customers. Under optimal price and inventory decisions, strategic waiting accounts for a large part of the firmâs total cost of financial distress, although a larger proportion of strategic customers may result in a lower probability of bankruptcy. In addition to inventory reduction and (immediate) price discount, we find that a deferred discount, in the form of rebates and/or store credits for future purchases, can act as an e ective mechanism to mitigate strategic waiting. As a contingent price reduction, deferred discounts align the interests of customers and the firm and are most e ective when the fraction of strategic customers is high and the firmâs financial distress is at a medium level. | - |
dc.language | eng | - |
dc.relation.ispartof | Manufacturing and Service Operations Management | - |
dc.subject | Deferred discount | - |
dc.subject | Strategic customers | - |
dc.subject | Store credit | - |
dc.subject | Rebate | - |
dc.subject | Pricing | - |
dc.subject | Liquidation sale | - |
dc.subject | Inventory | - |
dc.subject | Financial distress | - |
dc.title | When customers anticipate liquidation sales: Managing operations under financial distress | - |
dc.type | Article | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1287/msom.2017.0634 | - |
dc.identifier.scopus | eid_2-s2.0-85032004657 | - |
dc.identifier.volume | 19 | - |
dc.identifier.issue | 4 | - |
dc.identifier.spage | 657 | - |
dc.identifier.epage | 673 | - |
dc.identifier.eissn | 1526-5498 | - |
dc.identifier.isi | WOS:000423271600010 | - |
dc.identifier.issnl | 1523-4614 | - |