A consumer receives an offer for a new version of a mobile phone that will be released in two months: buy now and enjoy a 15 per cent discount. The offer will last only for a week, but the consumer is of two minds. She hasn’t seen the phone nor read any reviews of it. What if she doesn’t like it? Or, what if the phone is a big hit and the offer turns out to be a great bargain?

Both responses are forms of consumer regret and firms can – and have – profited by tailoring their policies to this emotion. A new study by Javad Nasiry and Ioana Popescu puts that phenomenon into a framework that models anticipated regret on consumer decisions and, importantly, firm profits and policies.

Their focus is on the advance selling context where consumers have to make a purchase decision before they can fully utilize the product or service. Examples of these kinds of decisions abound – buying tickets for sporting events before it is known which teams will be playing, airline and tour tickets, lottery tickets, even cars. General Motors offers a refund on the purchase of new cars if the customer returns it within 60 days.

“Consumers often make purchase decisions while uninformed about their true valuation for a product or service. Such decisions have emotional consequences once uncertainties about valuation and product availability are resolved, and consumers learn if, in hindsight, they have made the wrong choice,” the authors said.

“As consumers reflect, wrong decisions trigger emotions of ‘action regret’ or ‘inaction regret’ – in other words, ‘I should have waited’ or ‘I should have bought’. The anticipation of these emotions affects purchase decisions” and, thus, firm profits. Hence the need to understand them better.

The authors propose a framework that delineates these two kinds of regret and shows how they can lead to both inertia (delayed purchase) and frenzies. Consumers who regret buying will hurt profits, but inaction regret can be beneficial because, as observed elsewhere, it tends to spur people to accelerate purchases later on.

Firms can benefit from this through marketing, such as advertisements that exhort consumers to “buy now or regret later”, and pricing. In such a situation, while the advance price tends to be lower, it can be higher for last-minute purchasers.

“In contexts where not buying is associated with greater regret such as limited purchase opportunities or unique events, advance selling allows firms to create a buying frenzy,” they said. “Our result provides an emotionally rational explanation for how firms can create frenzies not by limiting supply but rather by selling only in advance.”

However, there are some caveats to this approach. Capacity constraints can diminish the effects, as can price pressures in the advance selling period. Most importantly, firms need to be mindful of action regret, which hurts profits more than inaction regret because it can lead firms to lower prices and booking limits. That situation is not hopeless, though, if refunds, resales and other mechanisms are used to mitigate regret.

Refunds help to insure consumers who advance purchase against a downside valuation risk. The model shows this has an interesting effect on pricing. “Above a certain threshold, the optimal advance price is increasing. This is in sharp contrast with the previous results where the optimal advance selling price was always decreasing. Intuitively, as regret becomes a bigger issue for consumers, the positive effect of a higher refund on top outweighs the negative effect of action regret,” they said.

Resales through secondary markets can also mitigate action regret, although firms must be careful not to allow brokers into the primary market. Options, where consumers purchase the right to buy a product on the spot through a nonrefundable deposit, also help firms to address regret, and in fact firms can sell more options than capacity because only a fraction will be exercised.

The authors advised that firms need to be aware that not everyone regrets, or regrets to the same extent, as this could affect policies.

“A firm with intermediate levels of capacity will segment the market in terms of regret and offer the product in both periods. In this case the pricing policy induces regretful customers to wait while nonregretfuls buy in advance,” they said.

Firms would also do well to be aware of the type of consumer that is regretting. They may be able to benefit by advance-selling to low-valuation consumers and spot selling to high-valuation consumers – a practice that can apply to industries such as airlines and tour operators.

Overall, the authors said, “our results underline the importance of understanding the relative strength of anticipated regrets within and across market segments as well as the type of uncertainty underlying customer valuations.”