Product-Line Design in the Presence of Consumers' Anticipated Regret

Consumers are often uncertain about their valuations for product quality when choosing among different products and will learn their valuations only after buying and using a product. Some consumers may thus experience overpurchase or underpurchase regret, depending on whether they have purchased a higheror lower-quality level than what they would have chosen had they known their true valuations. When consumers anticipate their potential postpurchase regret, their purchase decisions may be affected. Our analysis shows that overpurchase regret lowers the firm's profit, but underpurchase regret can benefit the firm if consumers' overpurchase regret is not strong. When the firm optimally designs its product line, the quality difference between its offerings will be larger (smaller) if consumers' anticipated regret increases (reduces) its profit. Surprisingly, although anticipated regret tends to reduce consumers' utility, in equilibrium, the presence of anticipated regret can increase consumers' expected surplus. We further examine when the firm should allow consumers to return their products by paying a restocking fee and how the optimal restocking fee will change with consumers' propensities for the two types of regret. We also experimentally show that consumers' propensities of underpurchase and overpurchase regret are different and can be influenced by the firm's messages.