The Price of Consumer Regret

A working paper in the IN SEAD Working Paper Series is intended as a means whereby a fac ulty researcher's thoughts and findings ma y be communicated to interested readers. The paper should be considered preliminary in nature and may require revision. Printed a t INSEAD, Fontainebleau, France. Kindly do not reproduce or circulate without permission. We study the effect of anticipated regret on consumer decisions, firm profits and policies, in an advance selling context where buyers have uncertain valuations. Advance purchases trigger action regret if valuations turn out to be lower than the price paid, otherwise delaying purchase causes inaction regret. Emotionally rational consumers act strategically in response to the firm's policies and in anticipation of regret. We characterize a regret threshold above which firms should only spot sell to homogeneous markets, otherwise advance selling is optimal. In heterogeneous markets, the seller offers the product in both periods, using regret as a segmentation mechanism. The effect of regret on profits depends on the type of regret, market structure and the firm's pricing power. Action regret lowers the optimal profits of a price-setting firm in homogeneous markets, while inaction regret has the opposite effect. Overall, regret adversely affects optimal profits whenever actions are regretted more than inactions. Otherwise, firms benefit from regret by creating a buying frenzy, where consumers advance purchase at negative surplus. Action regret can be profitable if high valuation consumers are more regretful, or if the firm is price constrained. Our results provide insights for designing effective campaigns to induce or mitigate regret.