Optimal pricing for advance selling with uncertain product quality and consumer fitness

Lei Xiao, Minghui Xu, Zhiyuan Chen and Xu Guan

Journal of the Operational Research Society, 2019, vol. 70, issue 9, 1457-1474

Abstract: We investigate a seller’s equilibrium pricing strategies under two classic advance selling pricing schemes. Under the dynamic pricing scheme, the seller sequentially decides his retail prices, while under the price commitment scheme, the seller simultaneously offers his retail prices. The consumers arrive sequentially depending on their awareness of advance selling, and a consumer’s valuation of the purchase is jointly determined by the inherent quality of the product and her private fitness of the product. However, both factors are uncertain in the advance period but can be resolved in the spot period. We show that under dynamic pricing, the flexibility of pricing does not necessarily lead to a higher payoff as it may also reduce the consumers’ willingness-to-buy in the advance period. Therefore, when consumers’ fitness differentiation is low, dynamic pricing becomes dysfunctional compared to non-advance selling. Under the price commitment scheme, although the seller suffers the risk of quality uncertainty by ex-ante determining the retail price, he can also strategically induce more consumers to buy in advance by claiming a high spot price. When the consumer fitness differentiation is low and the consumer’s awareness of advance selling is high, price commitment scheme dominates dynamic pricing scheme.

Date: 2019
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DOI: 10.1080/01605682.2018.1489342

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