Product price and delivery-time commitment decisions with reference effects

We study a retailer’s joint decisions on product assortment planning, pricing, and delivery-time commitments, taking into account the presence of reference effects of delivery time. Specifically, we consider the retailer committing to delivery times for its consumers, and consumers exhibiting reference dependence and loss aversion to the retailer’s delivery times. We characterize the optimal assortment policies for cases where product prices are either endogenous or exogenous. Moreover, our analysis reveals that the optimal modified markup for a product depends on the ratio between the retailer’s marginal cost and the consumers’ marginal utility. We also find that, due to the influence of reference effects, even when consumers are highly price-sensitive, raising product prices can still lead to higher profits for the retailer. In addition, when consumers’ price sensitivity coefficient is greater than a certain threshold, if the retailer has ability to jointly determine prices and delivery-time commitments, compared to the scenario where the retailer can only make decisions on delivery-time commitment, joint decision-making can lead to a win-win situation between the retailer and consumers. Our empirical study using real-world data shows that accounting for the reference effects of delivery time can improve the predictive accuracy of consumer choice behavior and has the potential to significantly increase retailer revenues. Finally, we extend our work by considering alternative forms of consumer utility.