Anticipated regret and product innovation

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 postpurchase regret. It has been experimentally shown that consumers may anticipate their potential postpurchase regret 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 that firms in various markets invoke regret to stimulate sales, this paper analytically explores whether and how anticipated regret affects competing firms' profits and product innovation. Our analyses reveal that the presence of anticipated regret can increase or decrease firms' profits, and foster or hinder product innovation depending on whether it makes the consumer segments more or less polarized; in other words, anticipated regret has a nonmonotonic effect on firms' profits and the entrant's optimal quality. Therefore, anticipated regret may sometimes create a win-win or a lose-lose situation for both firms. Regardless of whether the impact of anticipated regret on firms' profits is positive or negative, the magnitude of that impact tends to be higher for the low-quality firm.