Omnichannel management with consumer disappointment aversion

Abstract

With the popularity of omnichannel retailing, consumers are sophisticated enough to make strategic channel decisions, considering the possible disappointment for an unexpected outcome induced by various uncertainties from online and offline channels. Value uncertainty online can trigger low-value disappointment, and availability uncertainty offline may cause stock-out disappointment. This study characterizes the effect of consumers' anticipated disappointment aversion behavior on the optimal pricing decisions of retailers with or without inventory constraint in the omnichannel environment. When a retailer operates in dual-channel and faces offline inventory constraint, the concern for consumers' homogeneous disappointment aversion changes the threshold above which the retailer implement different channel pricing strategies. Then, we show how the negative impact of disappointment on profit and market can be mitigated by physical showroom mechanism, which is increasingly adopted by omnichannel management. Introduction of a cost-effective physical showroom expands the market by relaxing the restriction of stock-out disappointment and improves profit as long as consumers' low-value disappointment is high enough. Interestingly, the low-value disappointment benefits the omnichannel in expanding the market coverage by alleviating the constraint exerted by stock-out disappointment. Further discussions regarding the disappointment behavior are derived from the extension of consumers’ heterogeneity in disappointment-aversion.