Pricing, ordering, and quick response for online sellers in the presence of consumer disappointment aversion

Abstract

Consumers are usually uncertain about the product value in the online channel. They may feel disappointed if the outcome is worse than their prior expectation. This paper explores the effect of consumer disappointment aversion on the online seller’s decisions about pricing, ordering and quick response, where the seller can implement either a partial-coverage strategy or a full-coverage strategy. We identify conditions under which the seller should choose a partial-coverage strategy to target only “high-value” consumers. Furthermore, we show that disappointment aversion has a significant impact on the employment of quick response. In particular, when the degree of disappointment aversion is sufficiently high, the seller who implements a no-refund policy should not adopt quick response. Finally, we find that the effect of consumers’ disappointment aversion on the seller’s profit depends on the latter’s return policy. If the seller provides no refund to consumers, disappointment aversion is always detrimental to the seller. However, a seller who provides a full refund to consumers may benefit from disappointment aversion. Particularly, it is profitable to adopt a full-refund policy when disappointment aversion and salvage value exceed certain thresholds.