Wednesday, January 19, 2011

DIECIDUE Enrico, RUDI Nils, TANG Wenjie
Dynamic Purchase Decisions under Regret: Price and Availability
INSEAD Working Paper 2011/02/DS/TOM

We model a dynamic purchase context in which a consumer is uncertain about the product's valuation. The consumer has two purchase opportunities for the product: forward purchase in period 1 or spot purchase in period 2. Two forms of regret are considered: buyer's regret over the money paid in excess of his valuation of the product when buying forward; and hesitater's regret for the lost opportunity of an increased surplus when not buying forward. We illustrate how regrets a ect the purchase decision: a consumer is more likely to buy forward when more averse to hesitater's regret but more likely to delay the decision when more averse to buyer's regret. We also consider alternative consumer types to characterize how regret a ects their spot purchase decisions as well as what triggers the regret. We show that type inconsistencythat is, a consumer's incorrect anticipation of his future typeinduces an inferior period-1 purchase decision and thereby reduces the consumer's expected surplus.