Decisions on Probabilistic Selling for Consumers with Different Risk Attitudes

Consumer attitudes toward probabilistic goods are affected not only by their personal preferences, but also by their risk propensity. However, because the probability of obtaining their preferred items is determined by the retailer, consumers must search for related information and rely on their own subjective judgments to reduce the risk of not obtaining them. This study investigates the effects that consumer risk attitudes and word of mouth have on consumers’ purchase decisions regarding probabilistic goods and develops a pricing model for probabilistic selling in which a retailer offers probabilistic goods to heterogeneous consumers with different risk attitudes and possible social interactions. The analytical results show that a retailer’s profit decreases as the degree of risk aversion increases under the probabilistic selling strategy. In addition, word of mouth affects consumers’ purchasing decisions regarding different degrees of belief that they will obtain their preferred items. When the word-of-mouth effect decreases, the consumers’ perceived probability of obtaining their preferred items also decreases, which, consequently, reduces the retailer’s profits.