Probabilistic product design with regret-anticipated consumers

Designing and marketing new products are essential tasks for firms. In this paper, we consider a firm’s optimal strategy of utilizing existing products to synthesize a probabilistic product, which can result in a virtually new product without development cost. Consumers will experience regret and euphoria from purchasing a probabilistic product if they are assigned to low-quality and high-quality products, respectively. Uncertain about which product they would obtain, consumers anticipate this regret and euphoria before purchasing. We develop an analytical model to explore the effect of consumers’ anticipation on such a probabilistic product’s design and pricing, as well as the performance of the probabilistic selling strategy. We show that the firm can profit from consumers’ heterogeneous regret propensity under probabilistic selling. Interestingly, the probabilistic product may also benefit consumers. We further analyze endogenous quality choices. We find that the quality differentiation between the existing products increases with anticipated regret. Compared with the case without the probabilistic product, probabilistic selling will shrink (widen) the quality differentiation between the existing products when consumers’ regret perception is relatively low (high). Overall, by incorporating anticipated regret and euphoria behavior in our models and analyses, we provide firms with new managerial implications when adopting probabilistic selling as a marketing strategy for existing products.