Online installment payments and price guarantees under randomized pricing

Abstract

Internet technology allows e-tailers to provide installment payment services, allowing consumers to purchase products without immediate payment. In addition, retailers can apply intelligent pricing strategies and provide price-guarantee strategies to encourage consumers to buy in advance. This study uses a dynamic mechanism design to explore the interplay between pricing and financing strategies. Specifically, we combine a consumer credit service with a posterior price guarantee. Online monopolists switch between high and low prices with a certain probability in each period. If the retailer lowers the price during the price-guarantee period, it refunds the difference. Consumers are heterogeneous in their valuations of products and disposable personal income. Our analysis demonstrates that interest-free installments are more profitable when the proportion of consumers with high disposable personal income is low; otherwise, the retailer should provide installment services with a maximal loan interest rate that may increase with consumer valuation heterogeneity. Moreover, adopting price guarantees narrows the use of interest-free installments. Further, the use of installment payments makes the retailer increase the promotion probability and high price and shorten the length of the price-guarantee period when the proportion of consumers with a high disposable personal income is low. We also find that as consumers become more patient, the retailer should reduce the promotion probability and prolong the price-guarantee period.