Price and Assortment Competition under Consideration Set Formation: the Role of Anticipated Regret

Abstract

There are numerous evidence showing that consumers usually experience emotional dissonance (e.g. purchase regret) and anticipate it in consideration set formation process. Our paper investigates how anticipated regret affects consumers' consideration set formation and the relevant implications on sellers' price and assortment competition. We adopt a parallel search paradigm to explore how consumers form their consideration sets and use search depth and search breadth to alleviate anticipated regret, and to check how sellers optimally choose their prices and assortment sizes accordingly. Intuitively, regret not only lowers consumer surplus but also intensifies sellers' competition as consumers have incentive to include more competitive alternatives in consideration set to alleviate regret. However, our findings show that these intuitions may not always hold when search depth (i.e., the number of attributes to evaluate) is a choice. Specifically, we show that sellers may benefit from anticipated regret as it encourages consumers 1) to evaluate more product attributes (i.e., a deeper search depth) to alleviate regret (which increases consumers' willingness to pay); 2) to include less sellers to save search costs (which soften sellers' competition). Surprisingly, our results also show that anticipated regret can achieve a ``win-win-win" situation for consumers, sellers and social planner. We further explore sellers' assortment and price competition in reaction to anticipated regret, and demonstrate that sellers engage in assortment competition when regret intensity is low but price competition when it is high. Lastly, we show that both search cost and assortment may amplify the benefits of anticipated regret. Our analytic results provide potential interpretation to customers' search behavior under ecommerce environment and could guide sellers' assortment strategy and platform's search environment design.