Wednesday, October 22, 2014

Why Cusomers Upgrade their Reserved Options: The Impact of the Reservation Gap

YAO Dai, YANG Haiyang, GATIGNON Hubert
Read the working paper
INSEAD Working Paper 2014/56/MKT

This research investigates two-step transaction situations in which customers make an initial choice when they reserve an option (step one) and later finalize the purchase decision at the time of actual consumption (step two). In particular, we demonstrate the impact of the reservation gap—the time gap between making a reservation and actual consumption. We propose and show, using field data from one of the world’s leading car rental firms, that the reservation gap has a U-shaped relationship with the likelihood of customers upgrading their reserved cars to more premium ones at the time of consumption. We argue that this pattern of behavior is driven by customers’ deliberate planning and memory of the decision process. Consistent with this proposition, we find that the effect is stronger among customers whose deliberate planning is more affected by time (e.g., less-knowledgeable customers) and among customers who are more prone to memory decay (e.g., elderly customers). We conclude with a discussion of the implications for both firms and customers.