Damned if You Buy, Damned if You Wait: An Empirical Investigation of Customer Regret Under Markdown Pricing and Its Implications to Retailing

We study and quantify how much, in a markdown pricing situation, customers anticipate regret of paying a high price during the regular season or facing the possibility of a stockout during markdown season. In addition, we provide a framework to quantify the impact of customer regret on retailer’s optimal markdown pricing strategy and resulting revenues across various product categories. We model a regret-prone customer’s purchase decision using a utility based economic model, and estimate the parameters of this model with data obtained from the online channel of a luxury fashion retailer. We consider two types of anticipated regret, which are both incurred when a customer engages in counterfactual thinking at the beginning of a product’s selling season. If customers buy the product at a regular price, they anticipate high-price regret and hence incur the mental cost of knowing that the product may be available later at a discounted price. However, if customers wait for the discounted price, they anticipate stockout regret and hence incur the mental cost of possibly facing a stockout during the markdown season. We show that retailers only need to know the ratio between the two types of anticipated regret to account for their impact on customer purchase decisions and optimize pricing decisions accordingly. We develop an empirical strategy to jointly estimate this regret ratio and customers’ reservation price distribution parameters for each product. We find significant heterogeneity in regret characteristics across product categories. We show that stockout regret generally dominates high-price regret in magnitude. This dominance is even stronger for products that attract more high-spending customers and/or more frequent website visitors. Our counterfactual analysis shows that the luxury fashion retailer could have increased its revenues by up to 11.64% if it were to account for the anticipated customer regret in its pricing strategy. We also propose a method to disentangle the high-price and stockout regrets from the estimated regret ratio and show, for example, that stockout regret in a womenswear category is significantly larger than that of a similar menswear category.