IDEAS home Printed from https://ideas.repec.org/a/eee/transe/v158y2022ics1366554521003446.html
   My bibliography  Save this article

Advance booking discount strategies: Competition, information transparency and spot market

Author

Listed:
  • Ma, Shanshan
  • Li, Guo
  • Sethi, Suresh P.
  • Zhao, Xuan

Abstract

We consider two competing risk-neutral firms (A and B) that can procure raw materials via a forward contract and in a volatile spot market. They produce seasonable products using perishable raw materials. The raw material spot price is affected by their trading behavior depending on the extent of the firms’ market powers. To attract consumers ordering products at a discount price in an advance selling period, Firm A offers an advance booking discount (ABD) strategy and updates the demand and spot price information from the pre-orders. The rival Firm B can either not obtain, partially obtain, or completely obtain pre-order information from Firm A, thereby resulting in information non-transparency, partial transparency, or full transparency, respectively. We initially examine the base case in which Firm A does not offer ABD. We then derive equilibrium solutions under the three cases of information transparency. We find that when the profit margin is high and firms have medium market powers, then Firm A should not offer ABD; otherwise, it should. With ABD, less transparency enables Firm A to set a higher price. Interestingly, the expected profit of Firm B, under certain circumstances, can be higher than in the base case even when Firm B cannot get any pre-order information. On the other hand, when firms have low market powers, partial transparency is profitable for Firm B; otherwise, full transparency is profitable.

Suggested Citation

  • Ma, Shanshan & Li, Guo & Sethi, Suresh P. & Zhao, Xuan, 2022. "Advance booking discount strategies: Competition, information transparency and spot market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 158(C).
  • Handle: RePEc:eee:transe:v:158:y:2022:i:c:s1366554521003446
    DOI: 10.1016/j.tre.2021.102589
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1366554521003446
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.tre.2021.102589?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Haresh Gurnani & Mengze Shi, 2006. "A Bargaining Model for a First-Time Interaction Under Asymmetric Beliefs of Supply Reliability," Management Science, INFORMS, vol. 52(6), pages 865-880, June.
    2. Wei, Liqun & Zhang, Jianxiong & Zhu, Guowei, 2021. "Incentive of retailer information sharing on manufacturer volume flexibility choice," Omega, Elsevier, vol. 100(C).
    3. Meng Li & Nicholas C. Petruzzi, 2017. "Technical Note—Demand Uncertainty Reduction in Decentralized Supply Chains," Production and Operations Management, Production and Operations Management Society, vol. 26(1), pages 156-161, January.
    4. Xing, Wei & Li, Qiankun & Zhao, Xuan & Li, Jialu, 2020. "Information sale and contract selection under downstream competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 136(C).
    5. Tian Li & Shilu Tong & Hongtao Zhang, 2014. "Transparency of Information Acquisition in a Supply Chain," Manufacturing & Service Operations Management, INFORMS, vol. 16(3), pages 412-424, July.
    6. Merzifonluoglu, Yasemin, 2017. "Integrated demand and procurement portfolio management with spot market volatility and option contracts," European Journal of Operational Research, Elsevier, vol. 258(1), pages 181-192.
    7. Christopher S. Tang & Kumar Rajaram & Ayd{i}n Alptekinou{g}lu & Jihong Ou, 2004. "The Benefits of Advance Booking Discount Programs: Model and Analysis," Management Science, INFORMS, vol. 50(4), pages 465-478, April.
    8. Huang, Kwei-Long & Kuo, Chia-Wei & Shih, Han-Ju, 2017. "Advance selling with freebies and limited production capacity," Omega, Elsevier, vol. 73(C), pages 18-28.
    9. Zhao, Yingxue & Choi, Tsan-Ming & Cheng, T.C.E. & Wang, Shouyang, 2018. "Supply option contracts with spot market and demand information updating," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1062-1071.
    10. Wei Xing & Qi Zhang & Xuan Zhao & Liming Liu, 2019. "Effects of downstream entry in a supply chain with a spot market," IISE Transactions, Taylor & Francis Journals, vol. 51(10), pages 1110-1127, October.
    11. Muermann, Alexander & Shore, Stephen H., 2005. "Spot market power and future market trading," LSE Research Online Documents on Economics 24644, London School of Economics and Political Science, LSE Library.
    12. Jakubovskis, Aldis, 2017. "Strategic facility location, capacity acquisition, and technology choice decisions under demand uncertainty: Robust vs. non-robust optimization approaches," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1095-1104.
    13. Fiuza de Bragança, Gabriel Godofredo & Daglish, Toby, 2016. "Can market power in the electricity spot market translate into market power in the hedge market?," Energy Economics, Elsevier, vol. 58(C), pages 11-26.
    14. Stephen Shore & Alexander Muermann, 2005. "Spot Market Power and Future Market Trading," FMG Discussion Papers dp531, Financial Markets Group.
    15. Song Huang & Xu Guan & Ying†Ju Chen, 2018. "Retailer Information Sharing with Supplier Encroachment," Production and Operations Management, Production and Operations Management Society, vol. 27(6), pages 1133-1147, June.
    16. Zhang, Qiao & Zaccour, Georges & Zhang, Jianxiong & Tang, Wansheng, 2020. "Strategic pricing under quality signaling and imitation behaviors in supply chains," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    17. Shanshan Ma & Jie Lin & Wei Xing & Xuan Zhao, 2015. "Advance booking discount in the presence of spot market," International Journal of Production Research, Taylor & Francis Journals, vol. 53(10), pages 2921-2936, May.
    18. Markus Christen, 2005. "Research Note---Cost Uncertainty Is Bliss: The Effect of Competition on the Acquisition of Cost Information for Pricing New Products," Management Science, INFORMS, vol. 51(4), pages 668-676, April.
    19. Lode Li, 2002. "Information Sharing in a Supply Chain with Horizontal Competition," Management Science, INFORMS, vol. 48(9), pages 1196-1212, September.
    20. Xue, Musen & Zhang, Jianxiong & Zhu, Guowei, 2020. "Quantity decision timing with spillover effect and asymmetric demand information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    21. Zhan Pang & Wenqiang Xiao & Xuying Zhao, 2021. "Preorder Price Guarantee in e-Commerce," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 123-138, 1-2.
    22. Zhibin (Ben) Yang & Göker Ayd{i}n & Volodymyr Babich & Damian R. Beil, 2009. "Supply Disruptions, Asymmetric Information, and a Backup Production Option," Management Science, INFORMS, vol. 55(2), pages 192-209, February.
    23. Zhao, Lima & Huchzermeier, Arnd, 2019. "Managing supplier financial distress with advance payment discount and purchase order financing," Omega, Elsevier, vol. 88(C), pages 77-90.
    24. Chiou, Yu-Chiun & Liu, Chia-Hsin, 2016. "Advance purchase behaviors of air passengers: A continuous logit model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 474-484.
    25. Terry A. Taylor & Wenqiang Xiao, 2010. "Does a Manufacturer Benefit from Selling to a Better-Forecasting Retailer?," Management Science, INFORMS, vol. 56(9), pages 1584-1598, September.
    26. Kevin McCardle & Kumar Rajaram & Christopher S. Tang, 2004. "Advance Booking Discount Programs Under Retail Competition," Management Science, INFORMS, vol. 50(5), pages 701-708, May.
    27. Brian Tomlin, 2009. "Impact of Supply Learning When Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 192-209, August.
    28. Xuying Zhao & Zhan Pang & Kathryn E. Stecke, 2016. "When Does a Retailer's Advance Selling Capability Benefit Manufacturer, Retailer, or Both?," Production and Operations Management, Production and Operations Management Society, vol. 25(6), pages 1073-1087, June.
    29. Alptekinoglu, Aydin & Tang, Christopher S., 2005. "A model for analyzing multi-channel distribution systems," European Journal of Operational Research, Elsevier, vol. 163(3), pages 802-824, June.
    30. Li Jiang & Zhongyuan Hao, 2016. "Incentive-Driven Information Dissemination in Two-Tier Supply Chains," Manufacturing & Service Operations Management, INFORMS, vol. 18(3), pages 393-413, July.
    31. Man Yu & Roman Kapuscinski & Hyun-Soo Ahn, 2015. "Advance Selling: Effects of Interdependent Consumer Valuations and Seller’s Capacity," Management Science, INFORMS, vol. 61(9), pages 2100-2117, September.
    32. Güler, Kemal & Körpeoğlu, Evren & Şen, Alper, 2018. "Newsvendor competition under asymmetric cost information," European Journal of Operational Research, Elsevier, vol. 271(2), pages 561-576.
    33. Meng Li, 2019. "Overconfident Distribution Channels," Production and Operations Management, Production and Operations Management Society, vol. 28(6), pages 1347-1365, June.
    34. Wang, Kelly Yujie & Wen, Yuan & Yip, Tsz Leung & Fan, Zuojun, 2021. "Carrier-shipper risk management and coordination in the presence of spot freight market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 149(C).
    35. Mehmet Gümüş & Saibal Ray & Haresh Gurnani, 2012. "Supply-Side Story: Risks, Guarantees, Competition, and Information Asymmetry," Management Science, INFORMS, vol. 58(9), pages 1694-1714, September.
    36. Xu, Jinpeng & Feng, Gengzhong & Jiang, Wei & Wang, Shouyang, 2015. "Optimal procurement of long-term contracts in the presence of imperfect spot market," Omega, Elsevier, vol. 52(C), pages 42-52.
    37. Lingxiu Dong & Hong Liu, 2007. "Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power," Operations Research, INFORMS, vol. 55(1), pages 128-145, February.
    38. Zhao, Xuan & Xing, Wei & Liu, Liming & Wang, Shouyang, 2015. "Demand information and spot price information: Supply chains trading in spot markets," European Journal of Operational Research, Elsevier, vol. 246(3), pages 837-849.
    39. Mike Mingcheng Wei & Fuqiang Zhang, 2018. "Advance Selling to Strategic Consumers: Preorder Contingent Production Strategy with Advance Selling Target," Production and Operations Management, Production and Operations Management Society, vol. 27(7), pages 1221-1235, July.
    40. Shi, Chun-lai & Geng, Wei, 2021. "To introduce a store brand or not: Roles of market information in supply chains," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 150(C).
    41. Zeng, Fangli & Chan, Hing Kai & Pawar, Kulwant, 2020. "The adoption of open platform for container bookings in the maritime supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 141(C).
    42. Haim Mendelson & Tunay I. Tunca, 2007. "Strategic Spot Trading in Supply Chains," Management Science, INFORMS, vol. 53(5), pages 742-759, May.
    43. Zhang, Qiao & Chen, Jing & Zaccour, Georges, 2020. "Market targeting and information sharing with social influences in a luxury supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 133(C).
    44. Gérard P. P. Cachon & Pnina Feldman, 2017. "Is Advance Selling Desirable with Competition?," Marketing Science, INFORMS, vol. 36(2), pages 214-231, March.
    45. Kevin Zhu, 2004. "Information Transparency of Business-to-Business Electronic Markets: A Game-Theoretic Analysis," Management Science, INFORMS, vol. 50(5), pages 670-685, May.
    46. Xing, Wei & Liu, Liming & Wang, Shouyang, 2014. "More than a second channel? Supply chain strategies in B2B spot markets," European Journal of Operational Research, Elsevier, vol. 239(3), pages 699-710.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wu, Huamin & Li, Guo & Zheng, Hong & Zhang, Xuefeng, 2022. "Contingent channel strategies for combating brand spillover in a co-opetitive supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wen Zhang & Weizhe Yang, 2021. "Optimal pre-order strategy with delay in payments," Annals of Operations Research, Springer, vol. 305(1), pages 347-374, October.
    2. Qinhong Zhang & Xinyue Cheng & Yu-Chung Tsao & Dali Zhang, 2022. "Advance selling under deposit expansion and consumer’s valuation change," Operational Research, Springer, vol. 22(4), pages 3633-3661, September.
    3. Yawen Zhang & Bo Li & Xue Chen & Shuang Wu, 2020. "Online advance selling or not: Pricing strategy of new product entry in a supply chain," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(8), pages 1446-1461, December.
    4. Wen Zhang & Yi He, 2020. "Optimal advance selling discount strategy with future‐oriented consumers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 308-320, April.
    5. Wu, Meng & Teunter, Ruud H. & Zhu, Stuart X., 2019. "Online marketing: When to offer a refund for advanced sales," International Journal of Research in Marketing, Elsevier, vol. 36(3), pages 471-491.
    6. Oksana Loginova, 2021. "Advance selling, competition, and brand substitutability," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1765-1781, October.
    7. Peng, Weicai & Tian, Zhongjun, 2022. "Information acquisition, selling effort and pre-order strategy," International Journal of Production Economics, Elsevier, vol. 249(C).
    8. Lan, Yanfei & Cai, Xiaoqiang & Shang, Changjing & Zhang, Lianmin & Zhao, Ruiqing, 2020. "Heterogeneous suppliers’ contract design in assembly systems with asymmetric information," European Journal of Operational Research, Elsevier, vol. 286(1), pages 149-163.
    9. Jie Xiang & Juliang Zhang & T. C. E. Cheng & Jose Maria Sallan & Guowei Hua, 2019. "Efficient Multi-Attribute Auctions Considering Supply Disruption," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 36(03), pages 1-28, June.
    10. Zhibin (Ben) Yang & Göker Aydın & Volodymyr Babich & Damian R. Beil, 2012. "Using a Dual-Sourcing Option in the Presence of Asymmetric Information About Supplier Reliability: Competition vs. Diversification," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 202-217, April.
    11. Zhao, Xuan & Xing, Wei & Liu, Liming & Wang, Shouyang, 2015. "Demand information and spot price information: Supply chains trading in spot markets," European Journal of Operational Research, Elsevier, vol. 246(3), pages 837-849.
    12. Shi, Chun-lai & Geng, Wei, 2021. "To introduce a store brand or not: Roles of market information in supply chains," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 150(C).
    13. Wu, Junjian & Wang, Haiyan & Shang, Jennifer, 2019. "Multi-sourcing and information sharing under competition and supply uncertainty," European Journal of Operational Research, Elsevier, vol. 278(2), pages 658-671.
    14. Zhan Pang & Wenqiang Xiao & Xuying Zhao, 2021. "Preorder Price Guarantee in e-Commerce," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 123-138, 1-2.
    15. Hyoduk Shin & Tunay I. Tunca, 2010. "Do Firms Invest in Forecasting Efficiently? The Effect of Competition on Demand Forecast Investments and Supply Chain Coordination," Operations Research, INFORMS, vol. 58(6), pages 1592-1610, December.
    16. Shi, Xiutian & Dong, Ciwei & Cheng, T.C.E., 2018. "Does the buy-online-and-pick-up-in-store strategy with pre-orders benefit a retailer with the consideration of returns?," International Journal of Production Economics, Elsevier, vol. 206(C), pages 134-145.
    17. Xing, Wei & Liu, Liming & Wang, Shouyang, 2014. "More than a second channel? Supply chain strategies in B2B spot markets," European Journal of Operational Research, Elsevier, vol. 239(3), pages 699-710.
    18. Qi Feng & J. George Shanthikumar, 2018. "Supply and Demand Functions in Inventory Models," Operations Research, INFORMS, vol. 66(1), pages 77-91, 1-2.
    19. Seo, Kyowon & Go, Sarang & Kim, Byungdo, 2020. "Pricing strategies under markets with time gap between purchase and consumption," Journal of Business Research, Elsevier, vol. 120(C), pages 312-320.
    20. Niu, Baozhuang & Chu, Lap-Keung & Ni, Jian & Wang, Junwei, 2018. "Buy now and price later: Supply contracts with time-consistent mean–variance financial hedgingAuthor-Name: Li, Qiang," European Journal of Operational Research, Elsevier, vol. 268(2), pages 582-595.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:transe:v:158:y:2022:i:c:s1366554521003446. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/600244/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.