#1132 2016 · Özer & Zheng (Management Science) · Retail pricing and inventory operations
Markdowns win when you amplify the buyer's fear of missing the sale, not eliminate it
the problem
Classic theory said markdowns lose to steady pricing: buyers wait for the sale, so rational sellers commit to low price
background
The everyday-low-price (EDLP) thesis had become the doctrine of retail pricing: if a seller discounts to clear inventory, customers learn to wait for the sale, profits leak out of every clear-out, and a steady low price wins. Prior formal models had reinforced this — anticpated markdowns and gamesmanship were treated as taxes the seller must price around, so the rational answer was to abandon discounting.
Anyone trying to run markdowns against that doctrine was fighting a received result: the moment consumers can anticipate a future price cut, they withhold demand, and the clearance ends up moving nothing at full margin. The orthodoxy said the seller's own scheduling discipline was the only tool, and that tool had to point away from promotions.
what everyone would do
The textbook answer after the EDLP doctrine is to do the opposite of a promotion: commit to a single steady low price so buyers stop waiting for a sale. Pricing discipline replaces discounting, and the buyer's strategic game disappears. That was the prior research position, and it was the entire reason markdowns were presumed dead.
what they saw
Prior models treated regret and misperceived availability as bugs to price around, burying markdown profit. Model these motives and the verdict flips: markdown beats steady pricing — scant stock is the lever.
the move
Instead of treating the buyer's games as a bug to price around, Özer and Zheng modelled two behavioral motives the rational models had flattened — anticipated regret (the buyer who waits and then faces a stockout, or buys full-price and then sees it discounted) and misperception of availability (buyers routinely misread how much stock is actually left). Once those two real motives enter the model, the verdict flips: markdown beats everyday-low-price, and the seller wins by amplifying them rather than suppressing them — deliberately misperceived scarcity, such as disclosing low inventory levels, is the lever that makes the promotion profitable.
why it works
Everyday-low-price wins in the rational model because a predictable price gives the buyer no reason to rush and the seller no reason to discount. Inject real misperception of availability and that logic reverses: a buyer who cannot trust that the product will be there tomorrow discounts the future in their own head and pays more today to avoid regret. The seller's scarcity signal raises the perceived cost of waiting above the markdown, so the promotion harvests demand that would otherwise have been parked for the future — demand that costs the seller margin to keep waiting. Because the earlier models had flattened the buyer's availability estimate, they never exposed this switch, and so concluded markdowns always lose when the actual lever was sitting in the perceived-scarcity term they had deleted.
the payoff
Markdown beat steady pricing once the motives were modelled; ignoring them cost up to 10% profit (Özer & Zheng, Management Science).
where it breaks
The lever only works where the buyer's scarcity belief is controllable and cheap to move, and where waiting is genuinely costly. It fails with abundant transparent inventory and long shelves — a buyer who can see stock doesn't misperceive it, so disclosed scarcity reads as a fake and trust collapses. It also fails for commodity goods with no stockout risk, and where competitors undercut the same scarcity play simultaneously. And it is a knife's edge: overstate scarcity past credibility and the buyer learns to ignore the signal, permanently killing the lever.
what came after
The paper is the canonical reference for behavioral pricing in retail operations and supplied the scarcity-theater logic now used in flash sales and low-stock disclosures across e-commerce; its result is a demonstrated analytical conclusion of a peer-reviewed model, not a field sales figure.
references
- [1]Management Science 62(2):326-346 — "Markdown or Everyday Low Price? The Role of Behavioral Motives" (Özer & Zheng)INFORMS (Crossref record, publisher of record), 2016doi.org
- [2]OpenAlex work record — Markdown or Everyday Low PriceOpenAlex (bibliographic index), 2016api.openalex.org