UCL School of Management is delighted to welcome Tingliang Huang, Boston College, to host a research seminar discussing ‘Dynamic management of opaque selling when customers use anecdotal reasoning.’
Probabilistic or opaque selling, whereby the seller hides the exact identity of the product until after the buyer makes the payment, has been used in practice. The existing literature has largely focused on understanding why opaque selling is attractive to firms. In this paper, we intend to answer a practically important “follow-up” question: How should opaque selling be managed in a firm’s daily operations in practice? Answering this question is complex, since (i) the profitability of opaque selling depends on how customers respond to the firm’s product offering strategies and (ii) the firm’s strategies have to be responsive to customers’ purchasing decisions to maximise its long-term profit. We develop a dynamic programming framework to capture the dynamic nature of the problem in multiple periods when customers boundedly rationally expect the firm’s strategies through both adaptive learning and anecdotal reasoning. We characterise the firm’s optimal pricing and product offering policy, and prove that a convergent policy or the cyclic policy that oscillates between two points is optimal when customers heavily engage in anecdotal reasoning. In a general setting, we numerically find that the optimal policy involves cyclically oscillating between no more than five product-offering probabilities, based on which we develop a series of easy-to-implement heuristics for practice.