zbMATH — the first resource for mathematics

Partial refunds as a strategic price commitment device in advance selling in a service industry. (English) Zbl 07356121
Summary: Over the past decade, consumers’ strategic waiting behavior in anticipation of a price markdown has become increasingly common when advance selling is used. Recently, studies in the durable goods industry show that a partial refund strategy can activate the price-commitment mechanism to counter consumers’ strategic waiting, which is primarily driven by both consumers’ and retailers’ behaviors that discount the future. In this research, we investigate the possibility of using this partial refund strategy in a service industry context in which demand uncertainty and consumption state uncertainty act as major influential factors.
We study analytical models that consider the demand uncertainty of later arrivals and the consumption state uncertainty of early arrivals over two selling periods (advance and spot selling). Our results show a consistent pattern reflecting that a partial refund strategy in which the cancellation fee acts as a price-commitment mechanism is capable of emerging as the optimal strategy. Other than the strategic commitment mechanism, the cancellation fee paid by the advance buyers who choose to cancel their advance purchase also plays a profit-enhancer role. Combining these two mechanisms, a partial refund strategy dominates both a price-matching strategy and a dynamic pricing strategy, and they are only special cases of that type of strategy. Finally, comparative statistical analyses are conducted and reveal the impacts of demand-related parameters on the optimality of the partial refund strategy. These results provide instructive guidance for sellers when utilizing the partial refund strategy in their marketing practices.
90Bxx Operations research and management science
Full Text: DOI
[1] Akan, M.; Ata, B.; Dana, J., Revenue management by sequential screening, Journal of Economic Theory, 159, PB, 728-774 (2015) · Zbl 1330.91078
[2] Bilgin, B.; LeBoeuf, R. A., Looming losses in future time perception, Journal of Marketing Research, 47, 3, 520-530 (2010)
[3] Biyalogorsky, E.; Carmon, Z.; Fruchter, G. E.; Gerstner, E., Research note: Overselling with opportunistic cancellations, Marketing Science, 18, 4, 605-610 (1999)
[4] Biyalogorsky, E.; Gerstner, E., Contingent pricing to reduce price risks, Marketing Science, 23, 1, 146-155 (2004)
[5] Biyalogorsky, E.; Gerstner, E.; Weiss, D.; Xie, J., The economics of service upgrades, Journal of Service Research, 7, 3, 234-244 (2005)
[6] Borenstein, S.; Rose, N., Competition and price dispersion in the US airline industry, Journal of Political Economy, 102, 4, 653-683 (1994)
[7] Cachon, G. P.; Swinney, R., The value of fast fashion: Quick response, enhanced design, and strategic consumer behavior, Management Science, 57, 4, 778-795 (2011) · Zbl 1214.90070
[8] Chan, E.; Mukhopadhyay, A., When choosing makes a good thing better: Temporal variations in the valuation of hedonic consumption, Journal of Marketing Research, 47, 3, 497-507 (2010)
[9] Chatwin, R. E., Optimal dynamic pricing of perishable products with stochastic demand and a finite set of prices, European Journal of Operational Research, 125, 1, 149-174 (2000) · Zbl 0967.90003
[10] Chua, G. A.; Lim, W. S.; Yeo, W. M., Market structure and the value of overselling under stochastic demands, European Journal of Operational Research, 252, 3, 900-909 (2016) · Zbl 1347.91143
[11] Cohen-Vernik, D.; Pazgal, A., Price adjustment policy with partial refunds, Journal of Retailing, 93, 4, 507-526 (2017)
[12] Courty, P.; Li, H., Sequential screening, Review of Economic Studies, 697-717 (2000) · Zbl 0977.91028
[13] Dana, J. D., Advance-purchase discounts and price discrimination in competitive markets, Journal of Political Economy, 106, 2, 395-422 (1998)
[14] Dasu, S.; Tong, C., Dynamic pricing when consumers are strategic: Analysis of posted and contingent pricing schemes, European Journal of Operations Research, 204, 3, 662-671 (2010) · Zbl 1181.91066
[15] Desiraju, R.; Shugan, S., Strategic service pricing and yield management, Journal of Marketing, 44-56 (1999)
[16] Du, P.; Chen, Q., Skimming or penetration: optimal pricing of new fashion products in the presence of strategic consumers, Annals of Operations Research, 257, 1-2, 275-295 (2017) · Zbl 1415.91132
[17] Dudine, P.; Hendel, I.; Lizzeri, A., Storable good monopoly: The role of commitment, The American Economic Review, 1706-1719 (2006)
[18] Fruchter, G. E.; Gerstner, E., Selling with “satisfaction guaranteed”, Journal of Service Research, 1, 4, 313-323 (1999)
[19] Gale, I. L.; Holmes, T. J., Advance-purchase discounts and monopoly allocation of capacity, American Economic Review, 135-146 (1993)
[20] Gökgür, B.; Karabati, S., Dynamic and targeted bundle pricing of two independently valued products, European Journal of Operational Research, 279, 1, 184-198 (2019) · Zbl 1430.90358
[21] Jain, S.; Srivastava, J., An experimental and theoretical analysis of price-matching refund policies, Journal of Marketing Research, 37, 3, 351-362 (2000)
[22] Jing, B., Social learning and dynamic pricing of durable goods, Marketing Science, 30, 5, 851-865 (2011)
[23] Koenigsberg, O.; Muller, E.; Vilcassim, N. J., easyJet® pricing strategy: Should low-fare airlines offer last-minute deals, Quantitative Marketing and Economics, 6, 3, 279-297 (2008)
[24] Lai, G.; Debo, L.; Sycara, K., Buy now and match later: Impact of posterior price matching on profit with strategic consumers, Manufacturing & Service Operations Management, 12, 1, 33-55 (2010)
[25] Lee, C.; Tang, C. S.; Yin, R.; An, J., Fractional price matching policies arising from the ocean freight service industry, Production & Operations Management, 24, 7, 1118-1134 (2015)
[26] Levin, Y.; McGill, J.; Nediak, M., Optimal dynamic pricing of perishable items by a monopolist facing strategic consumers, Production and Operations Management, 19, 1, 40-60 (2010)
[27] Lim, W. S., Overselling in a competitive environment: Boon or bane?, Marketing Science, 28, 6, 1129-1143 (2009)
[28] Liu, Q.; van Ryzin, G., Strategic capacity rationing to induce early purchases, Management Science, 54, 6, 1115-1131 (2008) · Zbl 1232.91253
[29] Mann, D. P.; Wissink, J. P., Money-back contracts with double moral hazard, The RAND Journal of Economics, 285-292 (1988)
[30] Moorthy, S.; Srinivasan, K., Signaling quality with a money-back guarantee: The role of transaction costs, Marketing Science, 14, 4, 442-466 (1995)
[31] Nocke, V.; Peitz, M.; Rosar, F., Advance-purchase discounts as a price discrimination device, Journal of Economic Theory, 146, 1, 141-162 (2011) · Zbl 1244.91041
[32] Otero, D. F.; Akhavan-Tabatabaei, R., A stochastic dynamic pricing model for the multiclass problems in the airline industry, European Journal of Operational Research, 242, 1, 188-200 (2015) · Zbl 1341.91081
[33] Papanastasiou, Y.; Savva, N., Dynamic pricing in the presence of social learning and strategic consumers, Management Science, 63, 4, 919-939 (2017)
[34] Png, I. P.L., Most-favored customer protection versus price discrimination over time, Journal of Political Economy, 99, 5, 1010-1028 (1991)
[35] Sainam, P.; Balasubramanian, S.; Bayus, B. L., Consumer options: Theory and an empirical application to a sports market, Journal of Marketing Research, 47, 3, 401-414 (2010)
[36] Sato, K., Price trends and dynamic pricing in perishable product market consisting of superior and inferior firms, European Journal of Operational Research, 274, 1, 214-226 (2019) · Zbl 1430.90032
[37] Shen, Z.; Su, X., Customer behavior modeling in revenue management and auctions: A review and new research opportunities, Productions and Operations Management, 16, 6, 713-728 (2007)
[38] Shieh, S., Price and money‐back guarantees as signals of product quality, Journal of Economics & Management Strategy, 5, 3, 361-377 (1996)
[39] Shugan, S. M.; Xie, J., Advance pricing of services and other implications of separating purchase and consumption, Journal of Service Research, 2, 3, 227-239 (2000)
[40] Shugan, S. M.; Xie, J., Advance-selling as a competitive marketing tool, International Journal of Research in Marketing, 22, 3, 351-373 (2005)
[41] Stavins, J., Price discrimination in the airline market: The effect of market concentration, Review of Economics and Statistics, 83, 1, 200-202 (2001)
[42] Su, X., Optimal pricing with speculators and strategic consumers, Management Science, 56, 1, 25-40 (2010) · Zbl 1232.91261
[43] Subramanian, J.; Stidham, S.; Lautenbacher, C. J., Airline yield management with overbooking, cancellations, and no-shows, Transportation Science, 33, 2, 147-167 (1999) · Zbl 1002.90034
[44] Talluri, K.; Van Ryzin, G., The theory and practice of revenue management (2004), Springer · Zbl 1083.90024
[45] Xie, J.; Gerstner, E., Service escape: Profiting from customer cancellations, Marketing Science, 26, 1, 18-30 (2007)
[46] Xie, J.; Shugan, S. M., Electronic tickets, smart cards, and online prepayments: When and how to advance sell, Marketing Science, 20, 3, 219-243 (2001)
[47] Weatherford, L. R.; Bodily, S. E., A taxonomy and research overview of perishable-asset revenue management: yield management, overbooking, and pricing, Operations Research, 40, 5, 831-844 (1992)
[48] Wei, M. M.; Zhang, F., Recent research developments of strategic consumer behavior in operations management (2017), Computers & Operations Research
[49] Yin-Poole W. (2012) Sony engineers working on PS Vita “cost reduction” for post-2012 price cut. Euro Gamer (August 16), http://www.eurogamer.net/articles/2012-08-16-sony-engineers-working-on-ps-vita-cost-reduction-for-post-2012-price-cut.
[50] Zhao, M.; Xie, J., Effects of social and temporal distance on consumers’ responses to peer recommendations, Journal of Marketing Research, 48, 3, 486-496 (2011)
[51] Zhao, X.; Atkins, D.; Hu, M.; Zhang, W., Revenue management under joint pricing and capacity allocation competition, European Journal of Operational Research, 257, 3, 957-970 (2017) · Zbl 1394.91284
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.