Abstract: An experience good (e.g., phone and fashion) is a product that a consumer can not readily determine the value of the product until he uses it after purchase.When consumers purchase experience goods, they will be reference-dependent due to the uncertainty of the product value. The consumer feels psychological gain when the actual outcome is better than the expectation, and feels psychological loss otherwise. In reality, a lot of firms adopt product demonstrations to help consumers reduce the valuation uncertainty. Hence, it is necessary to study the impact of reference effect and product demonstrations on the firm's pricing and ordering decisions.
In this paper, the consumer's utility includes two components, i.e., economic utility and reference-dependent utility. Consumers are homogeneous in the uncertainty of the product value before purchase, but have their own valuations of the product after purchase. Based on the framework of newsvendor model, a joint pricing and ordering problem with the consideration of reference dependent effect is addressed, and the necessary conditions of the optimal solutions are obtained by the optimization method. Then, the impact of the product demonstration policy on the firm's decisions is explored. Demonstrations help consumers learn about the product value and arise two effects:the number of total consumers decreases and the consumer's reservation price increases. The necessary conditions of the optimal solutions under demonstrationsare obtained as well.
The main results are summarized as follows. First of all, for any given fill rate, the price with the reference dependence is higher than that without the reference dependence only when the probability that a consumer obtains a high value is greater than a threshold. Secondly, the reference dependence of the product value and the reference dependence of the price have the opposite effect on the optimal price. Thirdly, the optimal price is increasing in the given initial order quantity when consumers are loss aversion. Furthermore, the optimal price is increasing in the demonstration degree when the seller adopts a demonstration policy. Finally, more managerial insights are obtained by numerical studies. Particularly, the reference dependence and loss aversion in the price (product value)dimension have negative (positive) effect on the firm.

Key words: pricing, ordering, reference dependence, product demonstrations, consumer learning