Advance Booking Discount for Risk-Averse Firm in the Presence of Spot Market

Shanshan Ma, Wei Xing, Xiaohua Liu and Liyan Wang

Emerging Markets Finance and Trade, 2021, vol. 57, issue 8, 2246-2258

Abstract: We consider a risk-averse firm that procure intermediate goods through forward contract as well as in a B2B spot market and then use those goods to produce seasonal products. We examine when and why a risk-averse firm implements advance booking discount program. The firm that adopts this program initially decides the optimal discount coefficient and subsequently determines the order quantity of the forward contract. During the selling season, the firm can trade the intermediate goods on the B2B spot market. Our study finds that if the product has a relatively low wholesale price and the coefficient of variation in demand is relatively high, it is optimal for the firm to sell the product with a discount prior to the selling season. By contrast, the firm should not offer a discount if the product has a low wholesale price where the coefficient of variation in demand is relatively low or a relatively high wholesale price.

Date: 2021
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DOI: 10.1080/1540496X.2019.1623782

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