Strategic customer behavior with disappointment aversion customers and two alleviation policies

In this paper, we study the impact of strategic customers' disappointment aversion and decreasing valuation on strategic customer behavior and the effectiveness of two alleviation policies: pricing commitment and most-favored-customer protection. Consider a two-period model in which a seller makes the decisions of order quantity and sale price at the beginning of the first period. Customers will pay full price if they buy the product in the first period and the discounted price if they buy the product in the second period but their valuation decrease. However, the customers might not get the product when they decide to buy the product in the second period. Customers who can't get the product in the second period will feel disappointed. We show that strategic customers will decrease the order quantity, price and total profit. Furthermore, we study the effect of the price commitment policy to alleviate the strategic customer behavior, and identify the conditions under which the policy is effective. In addition, we compare the performance of the price commitment policy with that of the most-favored-customer protection policy and show that the latter is more beneficial to the seller. But both the two policies can't eliminate fully the strategic customer behavior.

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