Posterior price guarantee strategy with randomized pricing in electronic commerce

Abstract

The posterior price guarantee (PG) strategy, leveraging randomized pricing, has gained widespread adoption among retailers. Under this strategy, retailers operating within an infinite timeframe assure consumers that they will refund the price difference if the product is purchased prior to the price reduction. Consumers exhibit heterogeneity in terms of their valuation, patience, and concerns regarding PG. This study examines how consumer purchasing strategies impact the effectiveness of the PG strategy. Specifically, we examine how the PG strategy affects the retailer’s pricing, promotion probability, and the duration of the PG period. Our findings reveal that the PG strategy compels the retailer to decrease the probability of promotions and enhance their depth, which negatively impacts consumer surplus. Furthermore, we identify the optimal length of the PG period, which is contingent upon consumer characteristics and the nature of the product.