How can sellers react to consumers’ anticipated regret with service gap between channels

This paper investigates the operational decisions of competing online and offline retailers with consideration of consumers’ anticipated regret. Consumers are divided into two segments as informed and uninformed according to whether they correctly understand the valuation of offline service. For uninformed consumers, the misperception of the offline services valuation may trigger regret after purchase. To this end, we develop a game mode with consumers’ anticipated regret behaviour and derive the retailers’ optimal pricing strategies and offline service quality decisions. Furthermore, the O2O cooperating case is extended which allows online purchases to enjoy the offline service as well. Our results show that (1) Consumers’ uncertainty regarding the valuation of offline services gives rise to two distinct equilibrium outcomes, depending on whether the offline store targets sales to uninformed consumers or not. (2) A higher level of anticipated regret prompts a superior service quality and augments retailers’ profits. (3) O2O cooperation does not invariably benefit both online and offline retailers. Interestingly, cooperation may result in reduced service quality, and consumers anticipated regret can actually undermine retailers’ willingness to collaborate.