Abstract:

With intense market competition and rapid product updates， price reduction promotions have emerged as a crucial strategy for merchants to gain market share and optimize inventory management. However， such promotions also foster consumer behavior characterized by strategic waiting. Increasingly， consumers are deferring purchases upon learning about price reductions， anticipating further price drops. This strategic behavior introduces demand uncertainty， resulting in challenges such as stock shortages and inventory overhang， significantly impacting business decisions and the profitability of supply chain participants. Consequently， the implementation of flexible pricing and ordering strategies becomes imperative for ensuring business profitability， while effectively addressing strategic consumer behavior remains a noteworthy challenge. In response， many retailers have adopted rapid response mechanisms to promptly adjust supply in accordance with market demand fluctuations， thereby enhancing order fulfillment capabilities. Research has demonstrated the substantial impact of rapid response strategies on pricing， inventory management， and overall profitability. Additionally， return guarantees can bolster consumer confidence， stimulate early purchases， and mitigate strategic waiting behavior. Returns can be classified as either defective or non-defective， with the latter constituting the majority. While offering return services encourages customer spending， it also results in an increased volume of returns. However， the existing related literature is mostly based on the assumption that decision makers are completely rational. Overconfidence is a common cognitive bias. Under stochastic market demand， the retailer may estimate demand excessively precisely， leading the decision to deviate from the rational state and affecting profits. Therefore， four scenarios considering the retailer' overconfidence and return policies under the rapid response mode are examined. It investigates the optimal pricing and ordering decisions of the retailer when confronted with strategic consumers， analyzes the influence of the retailer' overconfidence and return policies on its decisions and profit， and explores the interplay between overconfidence and return policies.It focuses on the interaction between a responsive online retailer and strategic consumers. Under stochastic market demand， the retailer orders the product before the sales period and conducts two sales stages： the first at regular prices and the second with price reductions. Strategic consumers aim to maximize intertemporal utility by strategically timing their purchases. At the start of the selling period， market demand information is updated， and the responsive retailer replenishes inventory if the initial stock cannot meet the demand for the first stage. Two scenarios are considered for the retailer： non-overconfidence and overconfidence， with overconfidence manifesting as excessively accurate estimation of market demand. Both retailer types have expectations aligned with actual market demand， but the overconfident retailer believes the stochastic demand has a lower variance. Considering the possibility of customer dissatisfaction with online purchases， two return policies are examined： allowing returns and not allowing returns. Models are established for four scenarios： RN （allowing returns with a rational retailer）， RO （allowing returns with an overconfident retailer）， NN （not allowing returns with a rational retailer）， and NO （not allowing returns with an overconfident retailer）.The models are solved using backward induction to determine the retailer's optimal pricing and ordering decisions. Subsequently， an analysis of the impact of parameters such as the level of overconfidence and customer satisfaction on the optimal outcomes in each scenario is conducted. The results across different scenarios are compared to explore the effects of overconfidence and the allowance of returns， as well as their interactions. Furthermore， numerical simulations are performed to further analyze the findings. The primary findings of this study are as follows： whether returns are allowed or not， the average of market demand affects the impact of overconfidence on the retailer’s pricing and ordering decisions， and overconfidence doesn't necessarily cut into retailers' profits. Whether the retailer is overconfident or national， the retail price is higher and the order quantity is lower when return is allowed than those when return is not allowed， and the retailer can earn more profit in the case returns are allowed than in the case returns are not allowed only the satisfaction rate of consumers meets certain conditions. Also， allowing consumers to return goods amplifies the influence of overconfidence on retailers to deviate from optimal pricing and order quantity decisions. These can provide meaningful references for retailers and consumers.

Key words: overconfidence, strategic consumer, pricing, returns, rapid response