Research On Capacity Management Of Luxury Goods Based On Overconfidence Theory

The luxury goods have been paid close attention by the whole world for their high value,rareness and collectable value, so the luxury consumption has also been a hot topic. In recentyears, European and American market for the luxury goods are in recession. In contrast, therevenue is increasing continuously in the growing market like China. The Chinese consumersbuy all kinds of luxury goods not only in domestic but also overseas. The capacity of luxurygoods is numbered every year because of the rare materials, complicated production processand brand positioning. In that case, the luxury goods seller has to face a hard question thathow to allocate the limited products properly to balance the demands from different regionsof the world.Based on the overconfidence theory belongs to the finance research, we study the capacitymanagement of luxury goods seller when they are overconfident. Using the optimizationtheory, we build the luxury goods seller’s capacity allocation models in two different kinds ofstochastic demand with or without overconfidence. We get the optimal capacity allocationstrategies through models and make numerical analysis to testify our results. Through modeland numerical analyses, we find that sell’s overconfidence level has a major impact on thecapacity management decision. The main effects are:1. Under stochastic demand, given the other parameters, the impacts that overconfidencelevel have on seller’s optimal capacity allocation and his expected profit are related to theprice gap between two selling seasons.2. Under price-related stochastic demand, based on the given parameters, the impacts thatoverconfidence level has on seller’s optimal capacity allocation and his expected profitare also related to the price gap between two selling seasons. For the reason that the pricecan influence the demand directly, the seller would take the price sensitivity intoconsideration. We found that the effects that price of second selling season made toseller’s optimal decision is related to consumer’s price sensitivity.3. Under price-related stochastic demand, although the optimal capacity allocation andseller’s expected profit are increasing with the demand variance of the second sellingseason, the overconfidence level has different impacts on seller’s optimal decision indifferent price levels of second selling season and price sensitivity. In our research, wefound that in certain condition, the moderate overconfidence level can increase seller’sexpected profit.In addition to those conclusions, we have also got the impacts other parameters have onseller’s optimal decision. These propositions will be the foundation of the similar research infuture and they will be references for the luxury goods seller.