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The impact of consumer price forecasting behaviour on the bullwhip effect

As prices fluctuate over time, a strategic consumer may buy more in advance to reduce his or her future needs in anticipation of higher prices in the future, or may choose to postpone a purchase in anticipation of lower prices in the future. We investigate the bullwhip effect from a consumer price forecasting behavioural perspective in the context of a simple two-level supply chain composed of a supplier and a retailer. We consider two different forms for the demand function – linear and iso-elastic demand functions, both depending on the prices in multiple periods. Assuming that the retailer employs an order-up-to inventory policy with exponential smoothing forecasting technology, we derive analytical expressions for the bullwhip effect under the two demand functions, and extend the results to the multiple-retailer case. We find that consumer forecasting behaviour can reduce the bullwhip effect, most significantly when the consumer sensitivity to price changes is medium (approximately 0.5) for both the demand forms. In addition, for iso-elastic demand, the mitigation of the bullwhip effect induced by consumer price forecasting behaviour becomes more significant as the product price sensitivity coefficient and standard deviation of the price decrease. These findings are applicable to the development of managerial strategies by supply chain members that are conducive to bullwhip effect reduction through customer behaviour.