Anticipated Regret and Product Innovation

Abstract

When a firm introduces a product with new features, some consumers may find it difficult to assess their valuations for these new attributes. Their purchase decisions made under such uncertainty may lead to post-purchase regret. It has been experimentally shown that consumers anticipate their potential post-purchase regret in the future and make their current choices to mitigate or minimize it. That is, a consumer's anticipated regret can significantly impact his purchase decision. Given the trend among the firms in various markets to invoke regret to stimulate sales, this paper analytically explores whether and how anticipated regret affects competing firms' profits and product innovation. We find that anticipated regret can have both positive and negative effect on innovation and firms' profits. Our analyses reveal that the consumer's anticipated regret has non-monotonic effects on the level of innovation and firms' profits.

Keywords: anticipated regret, product innovation, behavioral economics, pricing, segmentation, competition

JEL Classification: D43, C72,D80