The Impact of Retailer Overconfidence on Pricing and Inventory in Supply Chain with Strategic Consumers

Abstract

This study investigates how retailer overconfidence shapes pricing and inventory decisions in a supply chain with strategic consumers. Forward-looking consumers may defer purchases in anticipation of markdowns, making inventory both an operational choice and a commitment device that influences expected availability and regular-season pricing. We develop a two-period game-theoretic model with one manufacturer, one retailer, and rational consumers, while allowing the retailer to hold overconfident demand beliefs in the form of overestimation or overprecision. The analysis shows that overestimation generally leads to higher inventory commitments, which depress regular-season prices and improve product availability, while retailer profit may decline because of margin compression and excess-inventory risk. Meanwhile, overprecision pulls inventory decisions toward the perceived mean demand, reducing inventory when the benchmark level is high and increasing it when the benchmark level is low. Its effects on price and inventory are therefore more conditional, especially on consumer patience. These findings show that retailer overconfidence affects not only forecasting accuracy but also equilibrium pricing and the distribution of gains across the supply chain. The study contributes to the literature by integrating overconfidence and strategic consumer behavior within a unified framework and offers implications for pricing, inventory management, and supply chain management.

Keywords

Strategic consumers / overconfidence / rational expectations / supply chain

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