In a paper titled, "Purchasing, Pricing and Quick Response in the Presence of Strategic Consumers," G?rard P. Cachon, professor of operations and information management at Wharton, and doctoral student Robert Swinney show how lean inventory systems are far more effective than initially thought in helping retailers determine the ideal size of their orders and the best markdown strategies when taking strategic buyers into account.

"The consumers are thinking 'Should I buy it now or later?' They form expectations about how likely it is the item will be around and how big the markdown will be," says Cachon. "If a strategic consumer concludes the markdown will be big and available, they will wait. There is an interaction between retailers and consumers when it comes to deciding on pricing and quantity.... They are playing a game."

The research shows that when strategic consumers are factored into a theoretical model, lean inventory -- or so-called "quick response" -- systems are, on average, 67% more profitable.

"Although it is well established in the literature that quick response provides value by allowing better matching of supply with demand, it provides more value, often substantially more value, by allowing a retailer to control the negative consequences of strategic behavior. Furthermore, this latter benefit can be substantial," Cachon and Swinney write in their study.

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