Both money-back guarantee (MBG) and low-price guarantee (LPG) are frequently implemented in retailing practice since the put options characteristics embedded in these two guarantees could positively influence consumer behavior. Retailers generally provide LPG to consumers to hedge the “price risk” while MBG is used for hedging the “risk of perceived products-value”.
Although a large proportion of retail stores offer both MBG and LPG at the same time, the valuation of them are usually calculated separately. Assuming a stochastic value process to describe uncertainties of the underlying variable, an applicable pricing model to value these two guarantees using real-option approach is proposed. One distinguishing feature of this study is to incorporate MBG and LPG simultaneously
With the proposed pricing model, the option values of MBG and LPG could be derived and the relationship between these two guarantees could be further clarified. Numerical analyses are conducted to demonstrate various scenarios and management implications are provided to assist retailers to price MBG and LPG. It is shown that the nature of MBG and LPG could capture upside potential value as well as mitigate downside risk exposure.
英文關鍵字
Money-back guarantee, Low-price guarantee, Product pricing, Real options
