Pricing Strategies in Advance Selling: Should a Retailer Offer Pre-order Price Guarantee?
AbstractAdvance selling is a marketing strategy by a firm that allows consumers to submit pre-orders for a new to-be-released product. It helps the firm to reduce uncertainty about future demand and consumers to avoid stock-out risks. At the same time, consumers might be reluctant to place advance orders if they are uncertain about their valuations for the product or when they expect future price cuts. To induce early purchases, the firm may offer pre-order price guarantee. This paper examines the firm's profit-maximizing strategy in a two-period setting characterized by market size uncertainty, consumer valuation uncertainty, and consumer experience/inexperience with the product. I show that when consumers are less heterogeneous in their valuations, the firm should implement advance selling and offer pre-order price guarantee. For some parameter configurations pre-order price guarantee acts as a commitment device not to decrease the price in the regular selling season. In other situations, it enables the firm to react to the information obtained from pre-orders by increasing or decreasing the price. When consumers are more heterogeneous in their valuations and the market size uncertainty is small, or the fraction of experienced consumers in the population is high, the firm should not implement advance selling.
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Bibliographic InfoPaper provided by Department of Economics, University of Missouri in its series Working Papers with number 1303.
Date of creation: 15 Mar 2013
Date of revision:
Publication status: forthcoming in Economic Modelling
advance selling; price guarantee; price commitment; the Newsvendor Problem; demand uncertainty; experienced consumers; inexperienced consumers;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-13 (All new papers)
- NEP-COM-2013-04-13 (Industrial Competition)
- NEP-MIC-2013-04-13 (Microeconomics)
- NEP-MKT-2013-04-13 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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