Pricing decisions with reference price effect and risk preference customers

More and more e-tailers are launching physical stores, in addition to their online presence. Whether and when it is best for the physical channel to be a pure showroom or a selling store remains unanswered. To address this issue, we develop a game-theoretical model wherein two competitive e-tailers decide to launch physical stores for showing only (as a showroom) or for actual transactions (as a selling store). By deriving the equilibrium, we obtain three major findings. First, building a pure showroom or a pure selling store is not always optimal. Interestingly, when the proportion of the store consumer segment is not too high, and the strength of the consumers' brand preference is intermediate, an asymmetric channel configuration occurs in equilibrium, that is, one e-tailer launches a showroom and the other launches the selling store. Second, if the strength of the consumers' brand preference is high relative to the proportion of the store consumer segment, a "prisoner's dilemma" emerges, that is, both e-tailers are worse off in the pure showroom channel configuration. Third, the total consumer surplus reaches the highest level if a symmetric showroom or an asymmetric channel equilibrium occurs. Otherwise, the equilibrium channel configurations are always suboptimal for consumers.

“…Lastly, our model considers perfectly rational e‐tailers and consumers. Bounded rationality may lead to interesting insights (H. Wang et al., ; N. Wang et al., ; Zhao et al., ).…”

Section: Resultsmentioning

confidence: 99%

For showing only, or for selling? The optimal physical store mode selection decision for e‐tailers under competition

Fan

Wang

Zhang

2019

“…Zhao et al. (2021) studied a pricing model where the customers have different risk preference and their valuations are affected by reference price. Zha et al.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Actually, with the rapid development of network technology, it is very convenient and efficient for online customers to utilize search engines or other search tools (such as Youdao Shopping Assistant and price‐comparison websites) to observe the target products' historical prices or the other sales channels' prices (Zhao et al., 2021). After observing these prices, strategic customers inevitably form reference prices for the target products in their minds.…”

Section: Introductionmentioning

confidence: 99%

Optimal pricing and ordering decisions with reference effect and quick replenishment policy

Zhao

Wang

2021

Self Cite

This paper considers a revenue management problem in which a retailer determines joint pricing and ordering decisions for a single product over a two‐period selling horizon. The goal is to investigate the single and combined influences of reference effect (RE) and quick replenishment (QR) policy on the customers' purchasing behaviors, the retailer's optimal decisions, and the total profit of two periods. We first propose a discrete‐time joint pricing and ordering model with RE and QR policy in the presence of strategic customers. Then we extend to the other two models, in which the retailer does not implement the QR policy and the retailer ignores the customers' RE, to, respectively, explore the values of RE and QR policy to the retailer. Several significant results and managerial insights are derived through theoretical analysis and numerical experiments. Implementing the QR policy could help the retailer cut nearly half of the initial order quantity and improve the profit significantly, especially when the strength of RE is large and the storage cost is high. With the QR policy, if the retailer ignores the RE that factually exists in the customers' minds, she would set lower prices, place fewer initial order quantity, and lose much profit, especially when she sells luxury products or the customers' purchasing behaviors are strongly affected by RE.

“…Recent progress in behavioral economics shows the importance of incorporating various psychological insights into firms' decision models. Examples include consumers' "buying frenzy" behavior (DeGraba, 1995;Courty and Nasiry, 2016), fairness concerns (Cui et al, 2007;Nie and Du, 2017), reference effects (Kopalle et al, 1996;Zha et al, 2021;Zhao et al, 2021), consumers' contextdependent preferences (Chen and Turut, 2013), and consumers' variety-seeking behavior (Sajeesh and Raju, 2010;Niu et al, 2019). Among these insights, pricing strategies for conspicuous goods in the presence of the snob effect has received much scholarly attention since the seminal paper of Leibenstein (1950) who formally introduced the snob effect as a negative consumption externality by which product scarcity increases consumer utility.…”

Section: Pricing In the Presence Of Snob Effectmentioning

confidence: 99%

Dynamic production and pricing decisions in the presence of the snob effect

Sogo

Matsubayashi

2021

This study analyzes the production and pricing strategy of a monopoly firm in the presence of the snob effect, whereby consumers value a product more when its availability is lower. Real-world firms often intentionally cause the snob effect by strategically reducing supply quantities or even causing shortages. This observation suggests the existence of a trade-off between utilizing the snob effect and avoiding opportunity costs. We consider a general multiperiod model in which a monopoly firm determines the dynamic paths of price and sales quantity; although consumers are not forward looking, they evaluate past stockouts with a discount factor. We find that the optimal dynamic paths of the price and output level vary depending on the degree of consumer sensitivity to stockouts, the consumer's discount factor on past shortage, and the firm's discount factor on future profit. Nevertheless, the total profit monotonically increases with the degree of consumer sensitivity to stockouts.