Applying Real Options Approaches in Retailing Pricing:Two Essays on the Valuation of Real Options Embedded in Products

• Main Authors: Hui-Tzu Lee, 李慧慈
• Other Authors: 陳育成
• Format: Others
• Language: en_US
• Published: 2016
• Online Access: http://ndltd.ncl.edu.tw/handle/22819595488701121775

博士 === 國立中興大學 === 財務金融學系所 === 104 === This dissertation contains two essays on product pricing in retailing market. In the first essay, we establish a real option pricing model for the valuation of both money-back guarantees (MBGs) and low-price guarantees (LPGs) which have been regarded as increasingly powerful tools for attracting consumers and gaining competitive edges in the marketplace. The model proposes the consumers’ perceived product value post purchase as a stochastic process and then regards an MBG as a contingent claim on the process. In the same manner, we also treat an LPG as a contingent claim with all possible outcomes of advertised-price elsewhere. Therefore, both MBGs and LPGs would be regarded as real options. In contrast to other studies merely dealing with one of the two options, the model jointly considers the MBG and LPG put options, in which particularly there’s a mutual exclusion relationship between both options, thereby constituting an interesting pricing issue. By the model, the optimal pricing strategies for MBGs and LPGs for various market conditions are discussed. The results indicate that both MBG and LPG option values have a tradeoff relation and thus managers need to carefully utilize those consumers’ risk-reduction mechanisms to create a win-win situation with the optimal pricing strategies. Our pricing model can help retailers evaluate the option values of MBGs and LPGs, and clarifies the relationship between both option values. In addition to model derivation, we also conduct numerical analyses to demonstrate various scenarios and provide management implications for retailer’s product pricing about MBGs and LPGs. The second essay investigates the real-option value contained in consumers'' initial purchase. In this study, we establish a pricing model for those real-option values. Due to high uncertainty of perceived value for initially-purchased products, the real-option values contained in those products would be substantial, and thus should not be ignored. We fairly evaluate the two real options about consumer’s initial purchase, namely, the repeat-purchase call option and the Money-Back Guarantee put option. The mutually exclusive relationship between the two options leads to an interesting valuation issue as well. When applied to products involving two types of risks, that is, valuation risk and breakage risk, the mutual exclusion of the two options makes model calibration rather challenging. This model expresses how these real options can create added-value for consumers and their interaction effects. In addition to derivation of the valuation model, we also conduct numerical analyses to illustrate effects of several factors on the options value. The study can broaden the understanding of consumers’ perceived value for the initial purchases, and thereby can help management to improve product-pricing decision making, especially for the case of developing a new product or a new market.