Credit offering strategy and dynamic pricing in the presence of consumer strategic behavior

Abstract

The dramatic growth of consumer credit market induces online platforms to adapt their operations in response to credit offering strategy when facing consumer strategic behavior. This study proposes a two-period pricing model for investigating platforms’ offering strategy of consumer credit and responding pricing policy, considering consumer strategic behavior and hassle cost from the credit. Consumers are heterogeneous in their disposable personal income (DPI) and valuations for the product, and are strategic in choosing the purchase timing to optimize their valuations. We find that the platform is willing to offer the credit when both the credit risk and the credit hassle cost are not sufficiently high, and the interest-free credit is sometimes more attractive over non-interest-free credit. In response to credit offering, the first and second period prices decrease as compared to the conventional case with no consumer credit, resulting in the increased first period demand and decreased second period demand. In addition, the platform's credit offering may mitigate consumer waiting behavior because of the direct effect of diminished passive waiting for consumers with low DPIs. Interestingly, credit offering may aggravate consumer strategic waiting. This may lead to an increased profit loss due to strategic consumer. Moreover, the proportion of consumers with high DPIs is critical for the platform in determining the credit offering strategy and pricing decision. Extended analyses uncover that positive spillover and network effects increase the platform's incentive to offer the credit. Surprisingly, credit offering may alleviate consumer strategic waiting when the strength of network effects is strong and hassle cost is low, and the platform's role, acting as a reseller or a marketplace has no qualitative effect on the consumer's strategic behavior.