Optimal Pricing for both Money-back and Low-price Guarantees in Retail Markets: A Real-Option Approach

Translated Titles





羅烈明(Lieh-Ming Luo);許和鈞(Her-Jiun Sheu);李志偉(Chih-Wei Lee);李慧慈(Hui-Tzu Lee)

Key Words

Money-back guarantee ; Low-price guarantee ; Product pricing ; Real options ; 退款保證 ; 最低價保證 ; 產品訂價 ; 實質選擇權



Volume or Term/Year and Month of Publication

33卷4期(2016 / 12 / 01)

Page #

617 - 637

Content Language


Chinese Abstract

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.

English Abstract


Topic Category 社會科學 > 管理學
  1. Luo, L. M.,Yang, P. Y.,Lee, S. H. T.,Tsai, W. P.(2014).The real-option value contained in consumers' initial purchase.Chiao Da Management Review,34(2),27-49.
  2. Moorthy, S., & Winter, R. A. 2002. Price-matching guarantees. Manuscript, University of Toronto, Canada.
  3. Padmanabhan, V., & Png, I. P. L. 1994. The effect of returns policies on pricing of services and perishable goods. Working paper, Graduate School of Business, Stanford University, California
  4. Akaah, I. P.,Korgaonkar, P. K.(1988).A Conjoint investigation of the relative importance of risk relievers in direct marketing.Journal of Advertising Research,28(4),38-44.
  5. Arbatskaya, M.(2001).Can low-price guarantees deter entry?.International Journal of Industrial Organization,19(9),1387-1406.
  6. Baye, M. R.,Morgan, J.(2004).Price dispersion in the lab and on the internet: Theory and evidence.RAND Journal of Economics,35(3),449-466.
  7. Biswas, A.,Dutta, S.,Pullig, C.(2006).Low price guarantees as signals of lowest price: The moderating role of perceived price dispersion.Journal of Retailing,82(3),245-257.
  8. Chu, W.,Chu, W.(1994).Signaling quality by selling through a reputable retailer: An example of renting the reputation of another agent.Marketing Science,13(2),177-189.
  9. Clay, K.,Krishnan, R.,Wolff, E.(2001).Prices and price dispersion on the web: Evidence from the online book industry.Journal of Industrial Economics,49(4),521-539.
  10. Copeland, T.,Antikarov, V.(2001).Real options: A practitioner's guide.New York:TEXERE.
  11. Cox, J. C.,Ross, S. A.,Rubinstein, M.(1979).Option pricing: A simplified approach.Journal of Financial Economics,7(3),229-263.
  12. Davis, S.,Gerstner, E.,Hagerty, M.(1995).Money back guarantees in retailing: Matching products to consumer tastes.Journal of Retailing,71(1),7-22.
  13. Edlin, A. S.,Emch, E. R.(1999).The welfare losses from price matching policies.Journal of Industrial Economics,47(2),145-168.
  14. Fruchter, G.,Gerstner, E.(1999).Selling with satisfaction guaranteed.Journal of Service Research,1(4),313-323.
  15. Grewal, D.,Munger, J. L.,Iyer, G. R.,Levy, M.(2003).The influence of internet-retailing factors on price expectations.Psychology & Marketing,20(6),477-493.
  16. Hawes, J. M.,Lumpkin, J. R.(1986).Perceived risk and the selection of a retail patronage mode.Journal of the Academy of Marketing Science,14(4),37-42.
  17. Heiman, A.,McWilliams, B.,Zhao, J.,Zilberman, D.(2002).Valuation and management of money-back guarantee options.Journal of Retailing,78(3),193-205.
  18. Heiman, A.,McWilliams, B.,Zilberman, D.(2001).Demonstrations and money-back guarantees: Market Mechanisms to reduce uncertainty.Journal of Business Research,54(1),71-84.
  19. Heiman, A.,McWilliams, B.,Zilberman, D.(2001).Reducing purchasing risk with demonstrations and money-back guarantees.Marketing Management Journal,11(1),58-72.
  20. Ho, H.,Ganesan, S.,Oppewal, H.(2011).The impact of store-price signals on consumer search and store evaluation.Journal of Retailing,87(2),127-141.
  21. Huchzermeier, A.,Loch, C.(2001).Project management under risk: Using the real option approach to evaluate flexibility in R&D.Management Science,47(1),85-101.
  22. Kaplan, L. B.,Szybillo, G. J.,Jacoby, J.(1974).Components of perceived risk in product purchase: A cross-validation.Journal of Applied Psychology,59(3),287-291.
  23. Lach, S.(2002).Existence and persistence of price dispersion: An empirical analysis.Review of Economics and Statistics,84(3),433-444.
  24. Levy, M.,Grewal, D.,Kopalle, P. K.,Hess, J. D.(2004).Emerging trends in retail pricing practice: Implications for research.Journal of Retailing,80(3),13-21.
  25. Luenberger, D. G.(1997).Investment science.New York:Oxford University Press.
  26. Luo, L. M.(2013).The valuation of money-back guarantees in retailing markets: A real option approach.Kybernetes: the International Journal of Cybernetics, Systems and Management Science,42(5),815-830.
  27. Lurie, N. H.,Srivastava, J.(2005).Price-matching guarantees and consumer evaluations of price information.Journal of Consumer Psychology,15(2),149-158.
  28. Majd, S.,Pindyck, R. S.(1987).Time to build, option value and investment decisions.Journal of Financial Economics,18(1),7-27.
  29. Mann, D.,Wissink, J.(1988).Money-back contracts with double moral-hazard.Rand Journal of Economics,19(2),285-292.
  30. Mann, D.,Wissink, J.(1990).Money-back warranties vs. replacement warranties.American Economic Review,80(2),432-436.
  31. Marcus, B.,Anderson, C. K.(2006).Online low-price guarantees - a real options analysis.Operations Research,54(6),1041-1050.
  32. McWilliams, B.(2012).Money-back guarantees: Helping the low-quality retailer.Management Science,58(8),1521-1524.
  33. McWilliams, B.,Gerstner, E.(2006).Offering low price guarantees to improve customer retention.Journal of Retailing,82(2),105-113.
  34. Moorthy, S.,Srinivasan, K.(1995).Signaling quality with a money-back guarantee: The role of transaction costs.Marketing Science,14(4),442-466.
  35. Pan, X.,Ratchford, B. T.,Shankar, V.(2002).Can price dispersion in online markets be explained by differences in e-tailer service quality?.Journal of the Academy of Marketing Science,30(4),433-445.
  36. Roselius, T.(1971).Consumer ranking of risk reduction methods.Journal of Marketing,35(1),56-61.
  37. Sorensen, A. T.(2000).Equilibrium price dispersion in retail markets for prescription drugs.Journal of Political Economy,108(4),833-850.
  38. Srivastava, J.,Lurie, N.(2001).A consumer perspective on price-matching refund policies: Effect on price perceptions and search behavior.Journal of Consumer Research,28(2),296-307.
  39. Sullivan, E. A.(2009).Guaranteeing success.Marketing News,20.
  40. Suwelack, T.,Hogreve, J.,Hoyer, W. D.(2011).Understanding money-back guarantees: Cognitive, affective and behavioral outcomes.Journal of Retailing,87(4),462-478.
  41. Thaler, R. H.,Tversky, A.,Kahneman, D.,Schwartz, A.(1997).The effect of myopia and loss aversion on risk taking: An experimental test.The Quarterly Journal of Economics,112(2),647-661.
  42. Van den Poel, D.,Leunis, J.(1999).Consumer acceptance of the internet as a channel of distribution.Journal of Business Research,45(3),249-256.