Pricing substitutable products under consumer regrets

Abstract

Since many firms provide consumers with substitutable products which may be launched sequentially over several periods, strategic consumers need to make their purchase-or-wait decisions at the beginning of the first period. However, they may face second period valuation uncertainty when such decisions are made, and decisions made under uncertainty may lead to regrets ex post. Lots of empirical studies show that consumers anticipate these regrets and take anticipated regrets into consideration. This paper studies the impact of valuation uncertainty and consumer anticipated regrets on consumer purchasing behavior, firm's prices and pricing strategy. We consider a firm selling two substitutable products over two periods, one product for one period, in a selling season. The firm announces all its prices at the beginning of the selling season (price commitment) or announces each price at the beginning of each period (dynamic pricing). Besides, a consumer may experience purchase regret from missing a better choice if she chooses to buy in the first period; and, otherwise, wait regret if she chooses to wait. Consumers make decisions based on the firm's prices and strategies, and the anticipated regrets. We find that a firm may need to set a lower price in the first period even when the average valuation in this period is higher. Second, with price commitment, the impact of each type of regret on the optimal second period price can be opposite and depends on the value of the uncertainty and regret parameters. Finally, we show that price commitment dominates dynamic pricing and the value of price commitment depends on the uncertainty and anticipated regret.