International Transactions in Operational Research

Optimal pricing strategy with disappointment‐aversion and elation‐seeking consumers: compared to price commitment

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Abstract Under a mark‐down policy, strategic consumers will deliberately delay the purchase of products at a low price. When strategic consumers consider basic valuation, shortage probability, selling price, etc., and then expect that they cannot buy the product at a low price, they feel a sense of disappointment; otherwise, they feel a sense of elation. In addition, when the effect of disappointment on utility is greater than that of elation, strategic consumers are disappointment averse; on the other hand, they are elation seeking. Thus, we consider optimal pricing and inventory decisions of a firm where strategic consumers are disappointment averse and elation seeking, respectively (i.e., they are emotionally rational). The results show that, there exists a unique rational expectation (RE) equilibrium in this scenario. In addition, disappointment aversion alleviates strategic consumer behavior and increases the firm's price, inventory, and profit, whereas elation seeking does the opposite. Moreover, we compare price commitment to the RE equilibrium when strategic consumers are emotionally rational. The results show that, unlike the rationally unemotional case, when the disappointment‐aversion level is above the threshold, the optimal strategy for the firm is the RE equilibrium. Conversely, when strategic consumers are elation seeking (or the disappointment‐aversion level is smaller than the threshold), the optimal strategy is price commitment.

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