Online store discount strategy in the presence of consumer loss aversion

Abstract

Consider a manufacturer׳s two marketing strategies: sell one product in a physical shop, or differentiate the product in some non-essential attribute and sell them in the physical shop and online store respectively. The consumers can be divided into two groups depending on whether or not they are loss averse. This paper explores whether the manufacturer should engage in online selling. If so, how does the manufacturer set an appropriate discount price and how many products should the manufacturer make available for each channel? We obtain the optimal discount strategy and product quantity under the conditions of different online profit margin and different expected consumer valuation. Finally, we analyze the influence of expected consumer valuation, valuation variability, and the degree of loss aversion to the optimal discount price and optimal expected profit.