Optimal pricing strategy for new products considering reference price effect in advance selling

Abstract

Previous research has shown that retailers’ operations and consumers’ purchase choices are significantly influenced by reference prices. This study explores a retailer selling some new products to strategic consumers in advance selling, and addresses the impact of reference price effect on the advance selling strategy and corresponding pricing decisions. Consumers’ choices are determined by their purchasing utilities which are dependent on the selling price in current period and the reference price. We first drive optimal selling prices and corresponding profits of the retailer under the scenarios of no advance selling, advance selling without considering the reference price effect, and advance selling with considering the reference price effect, respectively. We find an advance selling strategy is not always beneficial for the retailer. Besides, results present that the retailer benefits from considering reference price effects only if the positive reference effect is relatively high. Finally, numerical studies show that dynamic pricing is dominated by price commitment, which reaches the maximum when positive and negative reference effects parameters are both the highest.