Reselling or agency model under markdown pricing policy in the presence of strategic customers

This paper establishes a game‐theoretic model to investigate the effect of strategic customers on the business model choice between the reselling and the agency models under a markdown pricing policy. We find that the supplier always prefers the agency model whereas the retailer's preference depends on the commission rate, the proportion of strategic customers, and the supplier's inventory level. Results also reveal that regardless of the business model, the proportion of strategic customers, the patience level of strategic customers, and the supplier's inventory level are three driving forces in the markdown pricing policy. Finally, different from the conventional wisdom that suggests the centralized decisions always outperform the decentralized decisions, we find that the decentralized decisions under the agency model can achieve the same performance as the centralized decisions when the supplier has a relatively small inventory level. Surprisingly, when the supplier has a relatively large inventory level, the agency model outperforms the centralized model since the former leads to lower prices and stimulates more demand.