Reference effects describe an idea that consumers’ utility is somehow related to their expectations. Introduced by marketing and economics literature, reference effects have been used in revenue management field and emerged considerable research achievements.

In the first part of our work, we focus on recovering the quality and price patterns of the franchises in movie industry. We model a monopolistic firm selling products to loss-averse consumers. The products are perishable and have two attributes, price and quality. Every period, the consumers form their expectations about the new product and make purchasing plans before its launch. We assume that a consumer’s reference point is the outcome of her purchasing plan. After the launch of the new product, consumers need to deci...[ Read more ]

Reference effects describe an idea that consumers’ utility is somehow related to their expectations. Introduced by marketing and economics literature, reference effects have been used in revenue management field and emerged considerable research achievements.

In the first part of our work, we focus on recovering the quality and price patterns of the franchises in movie industry. We model a monopolistic firm selling products to loss-averse consumers. The products are perishable and have two attributes, price and quality. Every period, the consumers form their expectations about the new product and make purchasing plans before its launch. We assume that a consumer’s reference point is the outcome of her purchasing plan. After the launch of the new product, consumers need to decide to make the purchase or not. If consumers’ actual choices are different from their plans, i.e., their reference points, they may gain or lose extra utility. The design of planning stages in our time line is a new reference effects mechanism. By analyzing our model, we show that cyclic pricing policy is the optimal pricing policy for the firm, when the products’ quality is fixed. Our numerical examples show that the cyclic plan is not only optimal for the price, but also optimal for the quality. We then show that the franchises’ quality and price pattern can be characterized under certain parameters.

In the second part, we investigate the life-cycles of the smartphones owned by consumers. Again, we assume a monopolistic firm selling products to loss-averse consumers. Every period, the firm launches a brand-new product. All products sold by the firm can keep functioning for two periods. All consumers are required to possess at least one of those products. In each period, consumers without an operational product can choose from buying a discounted old product or buying a new product. And those consumers who have already had an old product can choose from replacing the old product they have with a new product or using the old product for one more period. When a consumer is considering one of her alternatives, the rest one will become her reference. Difference between alternatives will cause gain or loss in consumers utility. By analyzing our model, we derive the optimal prices and optimal qualities under special cases. Numerically, we recover the life-cycles mentioned above under some specific combinations of parameters.