Promotions by the Retailer

The retailer has to deal with various customer segments with different reactions to a promotion. Some customers may stockpile while others may not. The retailer can thus use a retail promotion to move product from retailer warehouse to the customer location depending on the customer 

How can the retailer characterize customer segments based on their propensity to stockpile An empirical study by Iyer and Ye ([50]) takes data regarding retail sales of soup and provides results of a fitted model. Details of this model are provided in Section 4.9, but the key idea is that the characterization of customer segments, their size and propensity to stockpile, can come from a statistically fitted model to data. 

Suppose the retailer were to buy from the manufacturer every k days. Dropping the retail price by X, will cause the low-holding-cost customers to do a break-even analysis and thus buy —-— units and stock up. This 

Additional details that could be incorporated (and that are in the papers by Iyer and Ye [50],[49]) adjust for the reservation price differences between the two segments. The following example illustrates the calculations. 

Suppose the retailer has parameters s = 80, a = 0.6, D = 100 cases per week, 5 days per week, = 0.02/case/day. Suppose the retailer buys once every 20 days. If the low-holding-cost customers have = 0.009/ case/day, then dropping the retailer price hy X = 0.18/case for 1 day would cause the retailer costs over 20 days to be 

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