Date: Dec. 29th, 2015

Time: 15:00

Venue: Room 802, Administration Building, Zijingang Campus

Speaker: Liu Lin，University of Central Florida 

Topic: Vertical Probabilistic Selling: the Role of Consumer Anticipated Regret

Host: Prof. Fan Xiaoping

About the Speaker: 

Lin’s research interests focus on online shopping intermediaries and consumers’ product evaluation.

Lin Liuand Anthony Dukes(2016), “Online Shopping Intermediaries: The Design of Search Environments,” Management Science, forthcoming in 2016.

Lin Liuand Anthony Dukes(2015), “Firm Search with Limited Product Evaluation,” Journal of Economics and Management Strategy, forthcoming in winter 2015.

Lin Liuand Anthony Dukes(2013), “Consideration Set Formation with Multiproduct Firms: The Case of Within-Firm & Across-Firm Evaluation Costs,” Management Science, 59(8), 1871-1886.

Lin Liu and Henry Wang(2013),“Entry Bias and Product Substitutability,” Journal of Institutional and Theoretical Economics, 169(2), 304-319.

Lin Liu, Henry Wang and Bill Yang(2012), “Strategic Choice of Channel Structure in an Oligopoly,” Managerial and Decision Economics, 33, 565-574.

Lin Liu and Henry Wang(2010), “Free Entry in a Cournot Market with Imperfectly Substituting Goods,” Economics Bulletin, 30(3), 1935-1941.

Abstract: This paper studies vertical probabilistic selling (mixing products with different qualities) when firms compete, and consumers have different abilities to anticipate the potential post-purchase regret raised by the possibility of obtaining the inferior products. We show that, when consumer show either no or full ability to anticipate the regret, probabilistic selling emerges only when the product differentiation between firms is intermediate. However, when consumers have partial ability to anticipate the regret, probabilistic selling will arise more often and yield higher profit compared with the previous two cases. This is due to the “reverse quality discrimination”: the perceived quality of the random product becomes non-increasing in consumer type. Such reverse discrimination can increase product differentiation at competition margin and, meanwhile, maintain sufficient attractiveness of the random product for infra-marginal consumers. Nevertheless, consumers’ perceived quality of the random product is not fully reversed in the full anticipation case, and this mutes the benefits from the “reverse quality discrimination.” Thus, the profit of probabilistic selling is not monotone in consumers’ ability to anticipate regret. Accordingly, the random product provider prefers consumers to anticipate the regret partially, but not fully. In addition, the probabilistic selling always benefits its provider, but may hurt the competitor.