Quantity Commitment Strategy and Effectiveness Analysis With Disappointment Aversion Strategic Consumers

Abstract

The impact of strategic consumers' disappointment aversion preference on retailer's inventory decision and profit when the retailer adopts quantity commitment strategy is studied in this paper. By comparing with the situation without quantity commitment, we analyze the effectiveness of this strategy. Through analytical analysis, we have the following conclusions. First, the optimal inventory level with quantity commitment is lower than that without quantity commitment, and both of them have positive correlations with the level of consumers' disappointment aversion. That is, consumers' disappointment aversion can mitigate the negative impact of their strategic behavior on the retailer's profit. Second, when other parameters are fixed and consumers' disappointment aversion level is below a certain threshold, the quantity commitment strategy is effective. However, when the cost is high, or consumer's valuation is low, or the salvage price is low, and at the same time if consumers' disappointment aversion level is high, then quantity commitment strategy can be ineffective. Finally, there are corresponding parameter intervals, when other parameters are fixed, the retailer's profit increment (when it is effective) by adopting quantity commitment strategy is positively related to consumers' valuation and salvage price of the product, and negatively related to the product cost. All our conclusions are illustrated in detail by numerical examples.