Retailers’ Optimal Pricing And Inventory Strategies With Disappointment-Aversion Or Elation-Seeking Consumers

Fashion apparel,seasonal goods,electronic products and other perishable goods often experience high and low price sales in two periods.When consumers expect that they are likely to buy these products at the low price,they will show strategic buying behavior.That is,they make the timing of the purchase by weighing the utility of buying at high and low price.Relevant literature indicates that the presence of strategic consumers reduces retailers’ pricing,inventory and profit.Due to the consumer’s strategic behavior,perishable retailers typically adopt the price commitment or quantity commitment to curb their strategic purchase behavior and guide them to purchase in advance.Most of the previous studies ignored the disappointment-aversion or elation-seeking behavior of strategic consumers.That is,when strategic consumers expect to be able to buy one product at low price(the clearance period),they will feel a sense of elation which can increase their utility during the clearance period;otherwise,they will feel a sense of disappointment which will reduce their utility during the clearance period.When disappointment has a greater impact on utility than elation,strategic consumers are disappointment averse,on the contrary,they are elation seeking.However,this paper considers the impacts of the disappointment aversion or elation seeking of strategic consumers on their strategic purchase behavior and the retailer’s three operational strategies,i.e.,rational expectation equilibrium(REE)strategy,price commitment and quantity commitment.Most of the previous studies only compared two of these strategies,and have less considered that strategic consumers are heterogeneous and that there are both myopic and strategic consumers.Hence,according to the logic from simple to complex,this paper discusses the impacts of the disappointment aversion or elation seeking of strategic consumers on the choice of retailer’s optimal operational strategy in three situations,in which strategic consumers are homogeneous,heterogeneous,and both myopic and strategic consumers exist,respectively.The main research contents and results are as follows.First,this paper studies the impacts of disappointment aversion or elation seeking on strategic consumer behavior and retailers’ REE strategy when strategic consumers are homogeneous.The results show that:(1)Disappointment aversion reduces the utility of strategic consumers in the clearance period so that they are reluctant to purchase the product during the clearance period.Hence,in the disappointment-aversion scenario,retailers should increase their pricing level and inventory quantity under REE to achieve higher profits.(2)Elation seeking plays the opposite role.Second,this paper compares the retailers’ REE strategy,price commitment and quantity commitment when strategic consumers are homogeneous.The results show that:(1)Quantity commitment is always not inferior to REE strategy.Particularly,when the disappointment-aversion level is below the threshold or in the elation-seeking case,quantity commitment is strictly superior to REE strategy.(2)When the disappointment-aversion level is above the threshold,quantity commitment is superior to price commitment which is different from the rationally unemotional case;otherwise,price commitment is superior to quantity commitment which is the same as the rationally unemotional case.(3)In the elation-seeking situation,the optimal strategy is always price commitment which is the same as the rationally unemotional case.Third,this paper extends the model to a situation where strategic consumers are heterogeneous,and studies the impacts of disappointment aversion(or elation seeking)on retailer’s REE strategy when the full price is exogenous and endogenous respectively,and compares retailer’s REE strategy and price commitment(or quantity commitment).The results show that:(1)When the full price is exogenous,for high-margin products,retailers should order more inventory to get higher profits when the disappointment-aversion level is above the threshold;otherwise,retailers should not order the product.(2)For low-margin products,retailers should order more inventory to get higher profits in the disappointment-aversion case;otherwise,retailers should order less inventory or not order products.(3)When the full price is endogenous,in heterogeneous consumers case,REE strategy is superior to price commitment if and only if the disappointment-aversion level is above the critical value,and quantity commitment is always not inferior to REE strategy.This is the same as the homogeneous consumers case.Finally,this paper extends the model to the situation where both myopic and strategic consumers exist,and discusses the impacts of strategic consumers’ proportion on retailer’s REE strategy,and compares retailer’s REE strategy and price commitment(or quantity commitment).The results show that:(1)When the disappointment-aversion level is not below the threshold,REE strategy is the reservation-price pricing strategy or the valuation pricing strategy.Otherwise,if and only if the strategic consumers’ proportion is not lower than the threshold,REE strategy is the reservation-price pricing strategy.(2)When the disappointment-aversion level is above the threshold,REE strategy is superior to price commitment.This is the same as the strategic-consumers-only case.Otherwise,if and only if the strategic consumers’ proportion is higher than the threshold,price commitment is superior to REE strategy.This is different from the strategic-consumers-only case.(3)In disappointment-aversion case,quantity commitment is not inferior to REE strategy.This is the same as the strategic-consumers-only case.In elation-seeking case,if strategic consumers’ proportion is higher than the threshold,quantity commitment is superior to REE strategy;conversely,quantity commitment is the same as REE strategy.This is different from the strategic-consumers-only case.