IDEAS home Printed from
   My bibliography  Save this article

The Economics of Buyer Uncertainty: Advance Selling vs. Probabilistic Selling


  • Scott Fay

    () (Department of Marketing, Marvin J. Whitman School of Management, Syracuse University, Syracuse, New York 13244)

  • Jinhong Xie

    () (Department of Marketing, University of Florida, Gainesville, Florida 32611)


Although advance selling and probabilistic selling differ in both motivation and implementation, we argue that they share a common characteristic--both offer consumers a choice involving buyer uncertainty. We develop a formal model to examine the general economics of purchase options that involve buyer uncertainty, explore the differences in buyer uncertainty created via these two strategies, and derive conditions under which one dominates the other. We show that the seller can address unobservable buyer heterogeneity by inducing sales involving buyer uncertainty via two different mechanisms: (1) homogenizing heterogeneous consumers and (2) separating heterogeneous consumers. Offering advance sales encourages customers to purchase while they are uncertain about their consumption states (more homogeneous), but offering probabilistic goods encourages customers to reveal their heterogeneity via self-selecting whether or not to purchase the uncertain product. The relative attractiveness of these two selling strategies depends on the degree of two types of buyer heterogeneity: (1) Max_Value-Heterogeneity, which is the variation in consumers' valuations for their preferred good, and (2) Strength-Heterogeneity, which is the variation in the strength of consumers' preferences. Neither strategy is advantageous unless the market exhibits sufficient Max_Value-Heterogeneity. However, whereas Strength-Heterogeneity can destroy the profit advantage of advance selling, a mid-range of Strength-Heterogeneity is necessary for probabilistic selling to be advantageous.

Suggested Citation

  • Scott Fay & Jinhong Xie, 2010. "The Economics of Buyer Uncertainty: Advance Selling vs. Probabilistic Selling," Marketing Science, INFORMS, vol. 29(6), pages 1040-1057, 11-12.
  • Handle: RePEc:inm:ormksc:v:29:y:2010:i:6:p:1040-1057

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Amiya Basu & Padmal Vitharana, 2009. "—Impact of Customer Knowledge Heterogeneity on Bundling Strategy," Marketing Science, INFORMS, vol. 28(4), pages 792-801, 07-08.
    2. Robert J. Dolan, 1987. "Quantity Discounts: Managerial Issues and Research Opportunities," Marketing Science, INFORMS, vol. 6(1), pages 1-22.
    3. David Godes & Dina Mayzlin, 2009. "Firm-Created Word-of-Mouth Communication: Evidence from a Field Test," Marketing Science, INFORMS, vol. 28(4), pages 721-739, 07-08.
    4. James D. Dana & Jr., 1998. "Advance-Purchase Discounts and Price Discrimination in Competitive Markets," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 395-422, April.
    5. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
    6. Liang Guo, 2009. "Service Cancellation and Competitive Refund Policy," Marketing Science, INFORMS, vol. 28(5), pages 901-917, 09-10.
    7. Chakravarthi Narasimhan, 1984. "A Price Discrimination Theory of Coupons," Marketing Science, INFORMS, vol. 3(2), pages 128-147.
    8. Gerstner, Eitan & Hess, James D & Holthausen, Duncan M, 1994. "Price Discrimination through a Distribution Channel: Theory and Evidence," American Economic Review, American Economic Association, vol. 84(5), pages 1437-1445, December.
    9. Brian Kahin & Hal R. Varian (ed.), 2000. "Internet Publishing and Beyond: The Economics of Digital Information and Intellectual Property," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611597, January.
    10. Scott Fay & Jinhong Xie, 2008. "Probabilistic Goods: A Creative Way of Selling Products and Services," Marketing Science, INFORMS, vol. 27(4), pages 674-690, 07-08.
    11. Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, vol. 83(1), pages 135-146, March.
    12. Eyal Biyalogorsky & Ziv Carmon & Gila E. Fruchter & Eitan Gerstner, 1999. "Research Note: Overselling with Opportunistic Cancellations," Marketing Science, INFORMS, vol. 18(4), pages 605-610.
    13. Walter Y. Oi, 1971. "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 85(1), pages 77-96.
    14. Liang Guo, 2006. "Consumption Flexibility, Product Configuration, and Market Competition," Marketing Science, INFORMS, vol. 25(2), pages 116-130, 03-04.
    15. Gale, Ian L. & Holmes, Thomas J., 1992. "The efficiency of advance-purchase discounts in the presence of aggregate demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 413-437, September.
    16. Jinhong Xie & Eitan Gerstner, 2007. "Service Escape: Profiting from Customer Cancellations," Marketing Science, INFORMS, vol. 26(1), pages 18-30, 01-02.
    17. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
    18. Jinhong Xie & Steven M. Shugan, 2001. "Electronic Tickets, Smart Cards, and Online Prepayments: When and How to Advance Sell," Marketing Science, INFORMS, pages 219-243.
    19. Eyal Biyalogorsky & Eitan Gerstner, 2004. "Contingent Pricing to Reduce Price Risks," Marketing Science, INFORMS, vol. 23(1), pages 146-155, March.
    Full references (including those not matched with items on IDEAS)


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

    Cited by:

    1. Yong Chao & Lin Liu & Dongyuan Zhan, 2016. "Vertical Probabilistic Selling under Competition: the Role of Consumer Anticipated Regret," Working Papers 16-14, NET Institute.
    2. Khouja, Moutaz & Pan, Jingming & Zhou, Jing, 2016. "Effects of gift cards on optimal order and discount of seasonal products," European Journal of Operational Research, Elsevier, vol. 248(1), pages 159-173.
    3. Gönsch, Jochen & Koch, Sebastian & Steinhardt, Claudius, 2014. "Revenue management with flexible products: The value of flexibility and its incorporation into DLP-based approaches," International Journal of Production Economics, Elsevier, vol. 153(C), pages 280-294.
    4. Alessio Emanuele BIONDO, 2011. "High-Tech Products and the Double Adverse Selection: Does Commercial Distribution Worsen Efficiency?," Journal of Knowledge Management, Economics and Information Technology,, vol. 1(7), pages 1-18, December.
    5. Erik Maier & Robert Wilken & Florian Dost, 2015. "The double benefits of consumer certainty: combining risk and range effects," Marketing Letters, Springer, vol. 26(4), pages 473-488, December.
    6. Xiaoqing Jing & Jinhong Xie, 2011. "Group Buying: A New Mechanism for Selling Through Social Interactions," Management Science, INFORMS, vol. 57(8), pages 1354-1372, August.
    7. repec:eee:proeco:v:193:y:2017:i:c:p:590-601 is not listed on IDEAS
    8. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2011. "Managing Consumer Returns in a Competitive Environment," Management Science, INFORMS, vol. 57(2), pages 347-362, February.
    9. Khouja, Moutaz & Zhou, Jing, 2015. "Channel and pricing decisions in a supply chain with advance selling of gift cards," European Journal of Operational Research, Elsevier, vol. 244(2), pages 471-489.
    10. Zheyin Gu & Giri Tayi, 2015. "Consumer mending and online retailer fit-uncertainty mitigating strategies," Quantitative Marketing and Economics (QME), Springer, vol. 13(3), pages 251-282, September.


    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:inm:ormksc:v:29:y:2010:i:6:p:1040-1057. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.