Recently, financial option theory has been applied to various types of investment decision problems. We consider an issue of how we determine capacity expansion decisions for flexible manufacturing plants when future options are present. Implications for retailer promotional strategies are discussed. We address this issue by investigating whether priming and price recognition can act as a substitute for price knowledge. The implications for price-based competition are discussed.
Retailers use sales signs to convey information about price discounts.
Consumers' interpretation of the magnitude and availability of future prices are influenced by this current period information. We develop an equilibrium price-signaling model which characterizes optimal use of sales signs. We present a model of rationality shopping behavior under price uncertainty. We show that as price variability increases, consumers take more shopping trips, buy smaller quantities per trip and spend less per trip. These model implications are tested on multicategory scanner panel data.