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The price of regret | MIT News

Let’s say you’ve just found a nice jacket in a store and are deciding whether to buy it. It’s a little pricey, so should you wait and hope it goes on sale in the future? Perhaps. Then again, the jacket might go out of stock before that happens, and you might never acquire it at all. Is it worth paying more now to avoid that feeling of regret?

For many people, evidently, it is. And as a paper co-authored by an MIT scholar suggests, not only do consumers tend to buy goods partly to avoid that feeling of regret, but some retailers fail to notice this behavioral quirk and thus miss an opportunity to increase their revenues.

Indeed, some retailers could have profits 7 to 10 percent higher if they pursued different pricing strategies, the study finds. That is, generally higher prices with occasional sales mixed in will yield more revenue than consistently low prices, at least for fashionable goods.

“The high-value customers will still buy the product,” says Karen Zheng, an assistant professor of operations management at the MIT Sloan School of Management. “They want to [avoid] this feeling of regret, which would occur if they wait now and then cannot get it in the future.” For such items, the research finds, if retailers fail to recognize consumers’ emotions, they could stock insufficient amounts of merchandise and may forgo up to 14 percent of consumer demand.

The paper, “Markdown or Everyday Low Price? The Role of Behavioral Motives,” appeared recently in print in the journal Management Science. The co-authors are Zheng and Özalp Özer, the Ashbel Smith Professor of Management at the University of Texas at Dallas.

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The price of regret | MIT News.

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