Optimal decisions for sellers considering valuation bias and strategic consumer reactions

In the online market for new and innovative products, valuation bias commonly occurs between the initial valuation before purchase and the true valuation after purchase as a result of the consumer's lack of knowledge regarding the product. Valuation bias works in a complex manner. On the one hand, positive valuation bias increases the seller's demand, while on the other hand, it can also cause consumers to return their purchases, which results in losses for the seller. This paper first investigates the effect of the bias on the seller's optimal pricing. The optimal price is determined always to increase strictly in the valuation bias if and only if the valuation bias does not exceed the consumer's return cost. This result remains true regardless of whether the seller decides on the stocking quantity. In addition to the valuation bias, we consider strategic consumer reactions to the bias in two selling periods, namely, the advance period and the spot period. Our analysis finds that the seller's selling strategies (e.g., pre-announcing pricing trends) are significantly affected by the relationship between valuation bias and the strategic consumer's estimation of the bias. In addition, though the optimal selling period is either the advance selling term or the spot selling term, the seller does not need to provide for both periods sequentially. We also determine that the unannounced pricing trend strategy and the announced non-increasing pricing trend strategy are equivalent when the seller faces strategic consumers.