Random Deal Offerings: Replenishment Decisions and Impact of Deal Duration and Buyer Information

 by
Emre Berk

Bilkent University

It is estimated that, in a year, firms spend on sales promotions (deal offerings) in the form of discounts, coupons,

rebates, etc. twice as much as they do on media advertising – in 2001, over $559 billion worldwide. Both in the

Operations Management and Marketing literature, there is active research on capturing the behavior of rational

buyers in such an environment. In particular, normative models on buyer stocking behavior and impact of promotions

on primary demand (no brand switching but accelerated purchasing/increased usage) have drawn quite attention in

the literature on OM-Marketing interface. In this talk, I will address the replenishment/stocking decisions of a rational,

cost-minimizing buyer in a market in which price promotions are offered by a seller in a seemingly random fashion.

Based on a Markovian fluctuating operating environment, three replenishment models will be analyzed: (i) when deal

durations are negligibly small compared to regular price durations;   (ii) when deal durations are positive but random

and unknown by the buyer; and, (iii) when deal durations are positive, random but exactly known by the buyer. The

first is a shock model and already available in the literature, whereas, the latter are new models.

Some optimality results will be presented on the proposed general models; two special cases as benchmarks will also

be considered.

My discussion of our findings will focus on : (i) the impact of deal durations on stocking decisions and costs
experienced by the buyer; (ii) the impact of deal durations on the revenues of the seller; and, (iii) the impact
of the buyer information content about deal durations on the revenues of the seller.