Optimizing mixed bundle pricing strategy: Advance selling and consumer regret

Abstract

In making purchase decisions, consumers often anticipate regret and take their remorse into consideration. In this research, we examine the impact of consumer's anticipated regret (e.g., action regret and inaction regret) on mixed bundle strategy in advance selling given uncertain consumer valuation. A consumer might experience action regret if she accepts a discount price associated with advance selling or bundling; or inaction regret if she rejects the discount and feels remorse. We propose an analytical model to optimize two-stage bundle pricing. The pricing model maximizes retailer's profit by taking into account consumer regret when facing advance selling. We find consumer regret has significant implications for retailers. When ignoring action regret, the retailer suffers a moderate loss in profit, but overlooking inaction regret would result a much higher loss. Retailers can mitigate the loss by employing advance selling. To maximize profit, retailers can bundle two products of big price difference to reduce the negative effect of consumer regret. Sensitivity analysis shows that the retailer can ignore consumer regret when bundling two products of moderate unit-profit contributions as the regret-induced profit loss is negligible. We also find for consumers of high regret level, retailers should sell high-profit products and bundles. In contrast, retailers should sell low-profit products and bundles to low-regret consumers to reduce the negative effect of regret behavior.