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Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee?

Oksana Loginova (loginovao@missouri.edu)

No 1602, Working Papers from Department of Economics, University of Missouri

Abstract: I consider a retailer who sells a new product over two periods: advance and regular selling seasons. Experienced consumers learn their valuations for the product in the advancesellingseason,whileinexperiencedconsumerslearnonlywhentheproductbecomes availableintheregularsellingseason. Theretailerisuncertainaboutthenumberofinexperienced consumers. Production takes place between the periods. Unsold units are scrapped at a price that is below the retailer’s marginal cost, which makes it costly to produce and notsell. Ishowthat whenconsumersare lessheterogeneousin theirvaluations, theretailer shouldimplementadvancesellingandofferapre-orderpriceguarantee. Forsomeparameter con?gurations a pre-order price guarantee acts as a commitment device not to decrease thepriceintheregularsellingseason. Inothersituations,itenablesthesellertoreacttothe information that is obtained from pre-orders by increasing or decreasing the price. When consumersaremoreheterogeneousintheirvaluations,themarketsizeuncertaintyissmall, or the scrap value is high, the retailer should not implement advance selling.

Keywords: advance selling; demand uncertainty; learning; price guarantee; price commitment; the Newsvendor problem. (search for similar items in EconPapers)
JEL-codes: C72 D42 L12 M31 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Published in Review of Industrial Organization 2016

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