When Prospect Theory Meets Consumer Choice Models: Assortment and Pricing Management with Reference Prices

Abstract

Problem definition: Reference prices arise as price expectations against which consumers evaluate products in their purchase scenarios. We investigate what will happen when prospect theory (e.g., reference prices) meets consumer choice models from the perspectives of both the consumers and the firm. Academic/practical relevance: Consumers see multiple relevant products on a particular purchase occasion and often compare their prices to form the willingness to pay when considering whether to purchase a particular product. Reference prices, which are not included in many choice models, may impact consumer choice behavior, so we incorporate reference prices into consumer choice models and investigate the operations management problems. Methodology: We take the widely used multinomial logit model as a showcase to examine the effects of reference prices through analytical and empirical study. We consider the optimization problems on assortment planning and pricing under consumer choice models with a variety of...