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Open AccessOpen Access JUSTC Management 25 September 2023

Supply chain optimization considering consumers’ mental accounting by time dimension in advance selling

  • 1.

    School of Management, University of Science and Technology of China, Hefei 230026, China

  • 2.

    School of Management, Shandong University, Jinan 250100, China

Cite this:
https://doi.org/10.52396/JUSTC-2023-0007
More Information
  • Author Bio:

    Yining Nan is a postgraduate student at School of Management, University of Science and Technology of China. Her research mainly focuses on behavioral operations management

    Tengfei Nie is a Professor at School of Management, Shandong University. He received his Ph.D. degree from the University of Science and Technology of China in 2014. His research mainly focuses on supply chain management, game theory, behavioral operations management, crowdfunding, and co-creation

  • Corresponding author: E-mail: ntf198602@sdu.edu.cn
  • Received Date: 17 January 2023
  • Accepted Date: 11 May 2023
    • Available Online: 25 September 2023
    Abstract

  • Abstract

    Advance selling activities based on e-commerce platforms have received much attention from consumers, which is a two-stage sales mode. However, many consumers have indicated that they are relatively happy to pay a deposit and feel more burdened at the final payment stage. That is, consumers feel differently at the two moments even though they know they will pay the same total amount for the product. This psychological behavior can be explained by mental accounting, which means the cognitive-computational process by which individuals or households code, evaluate, and record financial behavior. With the use of advance selling, this research has developed a game theoretical model to investigate how consumers’ mental accounting affects the optimal pricing and ordering decisions of supply chain members under wholesale price and revenue sharing contracts. The analysis shows that under wholesale price contracts, regardless of the optimal wholesale price set by the supplier, a portion of consumers will forgo the deposit paid, and the optimal order quantity for the retailer will always be equal to the consumers’ demand at the final payment stage. In exceptional cases, the optimal wholesale price may be equivalent to the retail price. The supplier’s optimal wholesale price increases monotonically with the consumer’s time coefficient for the price and decreases monotonically with the consumer’s time coefficient for product valuation. Furthermore, under a revenue sharing contract, there is a situation where the supplier’s optimal wholesale price is equal to cost. Additionally, a supplier’s optimal wholesale price exists such that none of the consumers will forgo the deposit they have paid. The study contributes to the understanding of mental accounting in advance selling and has implications for supply chain contract design.

    Graphical abstract

    The structure of the paper containing the supply chain members’ decision sequence.

    Abstract

    Advance selling activities based on e-commerce platforms have received much attention from consumers, which is a two-stage sales mode. However, many consumers have indicated that they are relatively happy to pay a deposit and feel more burdened at the final payment stage. That is, consumers feel differently at the two moments even though they know they will pay the same total amount for the product. This psychological behavior can be explained by mental accounting, which means the cognitive-computational process by which individuals or households code, evaluate, and record financial behavior. With the use of advance selling, this research has developed a game theoretical model to investigate how consumers’ mental accounting affects the optimal pricing and ordering decisions of supply chain members under wholesale price and revenue sharing contracts. The analysis shows that under wholesale price contracts, regardless of the optimal wholesale price set by the supplier, a portion of consumers will forgo the deposit paid, and the optimal order quantity for the retailer will always be equal to the consumers’ demand at the final payment stage. In exceptional cases, the optimal wholesale price may be equivalent to the retail price. The supplier’s optimal wholesale price increases monotonically with the consumer’s time coefficient for the price and decreases monotonically with the consumer’s time coefficient for product valuation. Furthermore, under a revenue sharing contract, there is a situation where the supplier’s optimal wholesale price is equal to cost. Additionally, a supplier’s optimal wholesale price exists such that none of the consumers will forgo the deposit they have paid. The study contributes to the understanding of mental accounting in advance selling and has implications for supply chain contract design.

    • Public Summary

    • This paper extends the impact of consumer mental accounting on demand to the decisions of a supplier and a retailer, and applies it to wholesale price contracts and revenue sharing contracts.
    • This paper divides mental accounting by time dimension and portrays the role of mental accounting on consumers’ perception of product valuation and product price by two time coefficients.
    • This paper reveals the impact of mental accounting on consumers’ perception and purchase decisions, and draws some counterintuitive conclusions.

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    • References(28)
  • [1]
    Thaler R H. Mental accounting matters. Journal of Behavioral Decision Making, 1999, 12 (3): 183–206. doi: 10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F
    [2]
    Kivetz R. Advances in research on mental accounting and reason-based choice. Marketing Letters, 1999, 10 (3): 249–266. doi: 10.1023/A:1008066718905
    [3]
    Henderson P W, Peterson R A. Mental accounting and categorization. Organizational Behavior and Human Decision Processes, 1992, 51 (1): 92–117. doi: 10.1016/0749-5978(92)90006-S
    [4]
    Erat S, Bhaskaran S R. Consumer mental accounts and implications to selling base products and add-ons. Marketing Science, 2012, 31 (5): 801–818. doi: 10.1287/mksc.1120.0731
    [5]
    Prelec D, Loewenstein G. The red and the black: Mental accounting of savings and debt. Marketing Science, 1998, 17 (1): 4–28. doi: 10.1287/mksc.17.1.4
    [6]
    Gourville J T, Soman D. Payment depreciation: The behavioral effects of temporally separating payments from consumption. Journal of Consumer Research, 1998, 25 (2): 160–174. doi: 10.1086/209533
    [7]
    Chen L, Kök A G, Tong J D. The effect of payment schemes on inventory decisions: The role of mental accounting. Management Science, 2013, 59 (2): 436–451. doi: 10.1287/mnsc.1120.1638
    [8]
    Quispe-Torreblanca E G, Stewart N, Gathergood J, et al. The red, the black, and the plastic: Paying down credit card debt for hotels, not sofas. Management Science, 2019, 65 (11): 5392–5410. doi: 10.1287/mnsc.2018.3195
    [9]
    Dai H, Milkman K L, Riis J. The fresh start effect: Temporal landmarks motivate aspirational behavior. Management Science, 2014, 60 (10): 2563–2582. doi: 10.1287/mnsc.2014.1901
    [10]
    Ülkü S, Hydock C, Cui S. Making the wait worthwhile: Experiments on the effect of queueing on consumption. Management Science, 2020, 66 (3): 1149–1171. doi: 10.1287/mnsc.2018.3277
    [11]
    Kaveh A, Nazari M, van der Rest J P, et al. Customer engagement in sales promotion. Marketing Intelligence & Planning, 2021, 39 (3): 424–437. doi: 10.1108/MIP-11-2019-0582
    [12]
    Ho T H, Png I P L, Reza S. Sunk cost fallacy in driving the world’s costliest cars. Management Science, 2018, 64 (4): 1761–1778. doi: 10.1287/mnsc.2016.2651
    [13]
    Ho T H, Zhang J. Designing pricing contracts for boundedly rational customers: Does the framing of the fixed fee matter? Management Science, 2008, 54 (4): 686–700. doi: 10.1287/mnsc.1070.0788
    [14]
    Becker-Peth M, Katok E, Thonemann U W. Designing buyback contracts for irrational but predictable newsvendors. Management Science, 2013, 59 (8): 1800–1816. doi: 10.1287/mnsc.1120.1662
    [15]
    Davis A M, Katok E, Santamaría N. Push, pull, or both? A behavioral study of how the allocation of inventory risk affects channel efficiency. Management Science, 2014, 60 (11): 2666–2683. doi: 10.1287/mnsc.2014.1940
    [16]
    Schultz K L, Robinson L W, Thomas L J, et al. The use of framing in inventory decisions. Production and Operations Management, 2018, 27 (1): 49–57. doi: 10.1111/poms.12782
    [17]
    Gu B, Zhang X. Prospect theory and the newsvendor problem with mental accounting. Journal of Systems Science and Systems Engineering, 2020, 29: 525–536. doi: 10.1007/s11518-019-5445-5
    [18]
    Shugan S M, Xie J. Advance-selling as a competitive marketing tool. International Journal of Research in Marketing, 2005, 22 (3): 351–373. doi: 10.1016/j.ijresmar.2004.11.004
    [19]
    Nasiry J, Popescu I. Advance selling when consumers regret. Management Science, 2012, 58 (6): 1160–1177. doi: 10.1287/mnsc.1110.1473
    [20]
    Yu M, Kapuscinski R, Ahn H S. Advance selling: Effects of interdependent consumer valuations and seller’s capacity. Management Science, 2015, 61 (9): 2100–2117. doi: 10.1287/mnsc.2014.2047
    [21]
    Ma S, Li G, Sethi S P, et al. Advance selling in the presence of market power and risk-averse consumers. Decision Sciences, 2019, 50 (1): 142–169. doi: 10.1111/deci.12318
    [22]
    Peng W, Tian Z, Wang Y. Price guarantee for advance selling in the presence of preorder-dependent social learning. International Journal of Production Economics, 2020, 219: 115–122. doi: 10.1016/j.ijpe.2019.05.015
    [23]
    Zhang Y, Li B, Zhao R. Resale or agency: Pricing strategy for advance selling in a supply chain considering consumers’ loss aversion. IMA Journal of Management Mathematics, 2022, 33 (2): 229–254. doi: 10.1093/imaman/dpab012
    [24]
    Prasad A, Stecke K E, Zhao X. Advance selling by a newsvendor retailer. Production and Operations Management, 2011, 20 (1): 129–142. doi: 10.1111/j.1937-5956.2010.01133.x
    [25]
    Wu M, Zhu S X, Teunter R H. Advance selling and advertising: A newsvendor framework. Decision Sciences, 2021, 52 (1): 182–215. doi: 10.1111/deci.12423
    [26]
    Zhang Z, Lim W, Cui H, et al. Partial refunds as a strategic price commitment device in advance selling in a service industry. European Journal of Operational Research, 2021, 291 (3): 1062–1074. doi: 10.1016/j.ejor.2020.10.001
    [27]
    Xie J, Liu D, Liang L, et al. Contract choice and advance selling strategy in a supply chain of FAP. PLoS ONE, 2022, 17 (3): e0265661. doi: 10.1371/journal.pone.0265661
    [28]
    Zhang W, He Y, Gou Q, et al. Optimal advance selling strategy with information provision for omni-channel retailers. Annals of Operations Research, 2021: 1–30. doi: 10.1007/s10479-020-03896-y
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    Figure  1.  Supply chain members’ decision sequence under the wholesale price contract.

    Figure  2.  Supply chain members’ decision sequence under the revenue sharing contract.

    [1]
    Thaler R H. Mental accounting matters. Journal of Behavioral Decision Making, 1999, 12 (3): 183–206. doi: 10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F
    [2]
    Kivetz R. Advances in research on mental accounting and reason-based choice. Marketing Letters, 1999, 10 (3): 249–266. doi: 10.1023/A:1008066718905
    [3]
    Henderson P W, Peterson R A. Mental accounting and categorization. Organizational Behavior and Human Decision Processes, 1992, 51 (1): 92–117. doi: 10.1016/0749-5978(92)90006-S
    [4]
    Erat S, Bhaskaran S R. Consumer mental accounts and implications to selling base products and add-ons. Marketing Science, 2012, 31 (5): 801–818. doi: 10.1287/mksc.1120.0731
    [5]
    Prelec D, Loewenstein G. The red and the black: Mental accounting of savings and debt. Marketing Science, 1998, 17 (1): 4–28. doi: 10.1287/mksc.17.1.4
    [6]
    Gourville J T, Soman D. Payment depreciation: The behavioral effects of temporally separating payments from consumption. Journal of Consumer Research, 1998, 25 (2): 160–174. doi: 10.1086/209533
    [7]
    Chen L, Kök A G, Tong J D. The effect of payment schemes on inventory decisions: The role of mental accounting. Management Science, 2013, 59 (2): 436–451. doi: 10.1287/mnsc.1120.1638
    [8]
    Quispe-Torreblanca E G, Stewart N, Gathergood J, et al. The red, the black, and the plastic: Paying down credit card debt for hotels, not sofas. Management Science, 2019, 65 (11): 5392–5410. doi: 10.1287/mnsc.2018.3195
    [9]
    Dai H, Milkman K L, Riis J. The fresh start effect: Temporal landmarks motivate aspirational behavior. Management Science, 2014, 60 (10): 2563–2582. doi: 10.1287/mnsc.2014.1901
    [10]
    Ülkü S, Hydock C, Cui S. Making the wait worthwhile: Experiments on the effect of queueing on consumption. Management Science, 2020, 66 (3): 1149–1171. doi: 10.1287/mnsc.2018.3277
    [11]
    Kaveh A, Nazari M, van der Rest J P, et al. Customer engagement in sales promotion. Marketing Intelligence & Planning, 2021, 39 (3): 424–437. doi: 10.1108/MIP-11-2019-0582
    [12]
    Ho T H, Png I P L, Reza S. Sunk cost fallacy in driving the world’s costliest cars. Management Science, 2018, 64 (4): 1761–1778. doi: 10.1287/mnsc.2016.2651
    [13]
    Ho T H, Zhang J. Designing pricing contracts for boundedly rational customers: Does the framing of the fixed fee matter? Management Science, 2008, 54 (4): 686–700. doi: 10.1287/mnsc.1070.0788
    [14]
    Becker-Peth M, Katok E, Thonemann U W. Designing buyback contracts for irrational but predictable newsvendors. Management Science, 2013, 59 (8): 1800–1816. doi: 10.1287/mnsc.1120.1662
    [15]
    Davis A M, Katok E, Santamaría N. Push, pull, or both? A behavioral study of how the allocation of inventory risk affects channel efficiency. Management Science, 2014, 60 (11): 2666–2683. doi: 10.1287/mnsc.2014.1940
    [16]
    Schultz K L, Robinson L W, Thomas L J, et al. The use of framing in inventory decisions. Production and Operations Management, 2018, 27 (1): 49–57. doi: 10.1111/poms.12782
    [17]
    Gu B, Zhang X. Prospect theory and the newsvendor problem with mental accounting. Journal of Systems Science and Systems Engineering, 2020, 29: 525–536. doi: 10.1007/s11518-019-5445-5
    [18]
    Shugan S M, Xie J. Advance-selling as a competitive marketing tool. International Journal of Research in Marketing, 2005, 22 (3): 351–373. doi: 10.1016/j.ijresmar.2004.11.004
    [19]
    Nasiry J, Popescu I. Advance selling when consumers regret. Management Science, 2012, 58 (6): 1160–1177. doi: 10.1287/mnsc.1110.1473
    [20]
    Yu M, Kapuscinski R, Ahn H S. Advance selling: Effects of interdependent consumer valuations and seller’s capacity. Management Science, 2015, 61 (9): 2100–2117. doi: 10.1287/mnsc.2014.2047
    [21]
    Ma S, Li G, Sethi S P, et al. Advance selling in the presence of market power and risk-averse consumers. Decision Sciences, 2019, 50 (1): 142–169. doi: 10.1111/deci.12318
    [22]
    Peng W, Tian Z, Wang Y. Price guarantee for advance selling in the presence of preorder-dependent social learning. International Journal of Production Economics, 2020, 219: 115–122. doi: 10.1016/j.ijpe.2019.05.015
    [23]
    Zhang Y, Li B, Zhao R. Resale or agency: Pricing strategy for advance selling in a supply chain considering consumers’ loss aversion. IMA Journal of Management Mathematics, 2022, 33 (2): 229–254. doi: 10.1093/imaman/dpab012
    [24]
    Prasad A, Stecke K E, Zhao X. Advance selling by a newsvendor retailer. Production and Operations Management, 2011, 20 (1): 129–142. doi: 10.1111/j.1937-5956.2010.01133.x
    [25]
    Wu M, Zhu S X, Teunter R H. Advance selling and advertising: A newsvendor framework. Decision Sciences, 2021, 52 (1): 182–215. doi: 10.1111/deci.12423
    [26]
    Zhang Z, Lim W, Cui H, et al. Partial refunds as a strategic price commitment device in advance selling in a service industry. European Journal of Operational Research, 2021, 291 (3): 1062–1074. doi: 10.1016/j.ejor.2020.10.001
    [27]
    Xie J, Liu D, Liang L, et al. Contract choice and advance selling strategy in a supply chain of FAP. PLoS ONE, 2022, 17 (3): e0265661. doi: 10.1371/journal.pone.0265661
    [28]
    Zhang W, He Y, Gou Q, et al. Optimal advance selling strategy with information provision for omni-channel retailers. Annals of Operations Research, 2021: 1–30. doi: 10.1007/s10479-020-03896-y
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