Thursday, January 20, 2011

Advance Selling When Consumers Regret
INSEAD Working Paper 2011/03/DS revised version of 2009/42/DS/TOM

We characterize the effect of anticipated regret on consumer decisions, firm profits and policies, in an advance selling context where buyers have uncertain valuations. Advance purchases trigger action regret if valuations turn out to be lower than the price paid, whereas delaying purchase may cause inaction regret from missing a discount or facing a stock-out. Emotionally rational consumers act strategically in response to the firm's policies and in anticipation of regrets. In this context, regret explains two types of behavioral patterns: inertia (delayed purchase) and frenzies (buying early at negative surplus). We further show how firms should optimally respond to consumer regrets, and characterize a normative regret threshold above which they should not advance sell. Action regret reduces profits, as well as the value of advance selling and booking limit policies for price-setting rms; inaction regret has the opposite effects. These effects are diminished by capacity constraints, and reversed for firms facing price pressure in the advance period, e.g. due to competition or market heterogeneity. Regret heterogeneity explains premium advance selling for capacitated rm, who may benefit from larger shares of regretful buyers. Finally, we show how the negative effects of regret on profits can be mitigated by regret-priming marketing campaigns, as well as offering refunds, options, or allowing resales. Our results emphasize the importance of assessing the relative strength of regrets within and across market segments, and accounting for these factors in pricing and marketing policies.