IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v61y2015i3p560-577.html
   My bibliography  Save this article

Rationing Capacity in Advance Selling to Signal Quality

Author

Listed:
  • Man Yu

    (Department of Information Systems, Business Statistics and Operations Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Hyun-Soo Ahn

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Roman Kapuscinski

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

We consider a seller who can sell her product over two periods, advance and spot. The seller has private information about the product quality, which is unknown to customers in advance and publicly revealed in spot. The question we consider is whether the seller has an incentive to signal quality in advance and, if so, how she can convey a credible signal of product quality. We characterize the seller's signaling strategy and find that rationing of capacity in the advance period is an effective tool of signaling product quality. We find that the high-quality seller can distinguish herself by allocating less capacity than the low-quality seller in the advance period. We show that this signaling mechanism exists whenever advance selling would be optimal for both the high-quality and low-quality sellers if quality were known by the consumers. Interestingly, the seller's ability to ration (rationing flexibility) sometimes disadvantages the seller; this effect is independent of product quality. This paper was accepted by Yossi Aviv, operations management .

Suggested Citation

  • Man Yu & Hyun-Soo Ahn & Roman Kapuscinski, 2015. "Rationing Capacity in Advance Selling to Signal Quality," Management Science, INFORMS, vol. 61(3), pages 560-577, March.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:3:p:560-577
    DOI: 10.1287/mnsc.2013.1888
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2013.1888
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2013.1888?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
    ---><---

    References listed on IDEAS

    as
    1. Kyle Bagwell & Garey Ramey, 1988. "Advertising and Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 59-71, Spring.
    2. Qian Liu & Garrett J. van Ryzin, 2008. "Strategic Capacity Rationing to Induce Early Purchases," Management Science, INFORMS, vol. 54(6), pages 1115-1131, June.
    3. Javad Nasiry & Ioana Popescu, 2012. "Advance Selling When Consumers Regret," Management Science, INFORMS, vol. 58(6), pages 1160-1177, June.
    4. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    5. Axel Stock & Subramanian Balachander, 2005. "The Making of a "Hot Product": A Signaling Explanation of Marketers' Scarcity Strategy," Management Science, INFORMS, vol. 51(8), pages 1181-1192, August.
    6. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    7. Leon Yang Chu & Hao Zhang, 2011. "Optimal Preorder Strategy with Endogenous Information Control," Management Science, INFORMS, vol. 57(6), pages 1055-1077, June.
    8. Dubois, Pierre & Nauges, Céline, 2010. "Identifying the effect of unobserved quality and expert reviews in the pricing of experience goods: Empirical application on Bordeaux wine," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 205-212, May.
    9. Yossi Aviv & Amit Pazgal, 2008. "Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 339-359, December.
    10. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    11. Xuanming Su, 2009. "Consumer Returns Policies and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, vol. 11(4), pages 595-612, March.
    12. Richard J. Gilbert & Paul Klemperer, 2000. "An Equilibrium Theory of Rationing," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 1-21, Spring.
    13. Athey, Susan, 2001. "Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Econometrica, Econometric Society, vol. 69(4), pages 861-889, July.
    14. Sridhar Moorthy & Kannan Srinivasan, 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs," Marketing Science, INFORMS, vol. 14(4), pages 442-466.
    15. Dmitri Kuksov & Kangkang Wang, 2013. "A Model of the "It" Products in Fashion," Marketing Science, INFORMS, vol. 32(1), pages 51-69, July.
    16. Janssen, Maarten C.W. & Moraga-Gonzalez, Jose Luis & Wildenbeest, Matthijs R., 2005. "Truly costly sequential search and oligopolistic pricing," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 451-466, June.
    17. Awi Federgruen & Aliza Heching, 1999. "Combined Pricing and Inventory Control Under Uncertainty," Operations Research, INFORMS, vol. 47(3), pages 454-475, June.
    18. Guillermo Gallego & Özge Şahin, 2010. "Revenue Management with Partially Refundable Fares," Operations Research, INFORMS, vol. 58(4-part-1), pages 817-833, August.
    19. 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.
    20. Xuanming Su, 2007. "Intertemporal Pricing with Strategic Customer Behavior," Management Science, INFORMS, vol. 53(5), pages 726-741, May.
    21. David Easley & Maureen O'Hara, 2009. "Ambiguity and Nonparticipation: The Role of Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1817-1843, May.
    22. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2009. "Optimal Restocking Fees and Information Provision in an Integrated Demand-Supply Model of Product Returns," Manufacturing & Service Operations Management, INFORMS, vol. 11(4), pages 577-594, December.
    23. Cuihong Li & Fuqiang Zhang, 2013. "Advance Demand Information, Price Discrimination, and Preorder Strategies," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 57-71, September.
    24. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
    25. 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.
    26. Hauser, John R & Wernerfelt, Birger, 1990. "An Evaluation Cost Model of Consideration Sets," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 16(4), pages 393-408, March.
    27. Birger Wernerfelt, 1988. "Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 458-466, Autumn.
    28. I. P. L. Png, 1989. "Reservations: Customer Insurance in the Marketing of Capacity," Marketing Science, INFORMS, vol. 8(3), pages 248-264.
    29. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer.
    30. Xuanming Su & Fuqiang Zhang, 2009. "On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers," Management Science, INFORMS, vol. 55(5), pages 713-726, May.
    31. Jinhong Xie & Steven M. Shugan, 2001. "Electronic Tickets, Smart Cards, and Online Prepayments: When and How to Advance Sell," Marketing Science, INFORMS, vol. 20(3), pages 219-243, June.
    Full references (including those not matched with items on IDEAS)

    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. Dror Hermel & Benny Mantin, 2018. "Selling to strategic consumers: on the benefits of consumers’ valuation uncertainty and abundant inventory," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 17(3), pages 146-165, June.
    2. 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.
    3. Zhang, Chong & Yu, Man & Chen, Jian, 2022. "Signaling quality with return insurance: Theory and empirical evidence," Other publications TiSEM 184da313-a89e-4a81-9f23-c, Tilburg University, School of Economics and Management.
    4. Chong Zhang & Man Yu & Jian Chen, 2022. "Signaling Quality with Return Insurance: Theory and Empirical Evidence," Management Science, INFORMS, vol. 68(8), pages 5847-5867, August.
    5. Mehmet Sekip Altug & Tolga Aydinliyim, 2016. "Counteracting Strategic Purchase Deferrals: The Impact of Online Retailers’ Return Policy Decisions," Manufacturing & Service Operations Management, INFORMS, vol. 18(3), pages 376-392, July.
    6. Jihwan Moon & Steven M. Shugan, 2018. "Explaining Bundle-Framing Effects with Signaling Theory," Marketing Science, INFORMS, vol. 37(4), pages 668-681, August.
    7. Feng, Hong & Fu, Qiang & Zhang, Lan, 2020. "How to Launch a New Durable Good: A Signaling Rationale for Hunger Marketing," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    8. Xuanming Su, 2010. "Optimal Pricing with Speculators and Strategic Consumers," Management Science, INFORMS, vol. 56(1), pages 25-40, January.
    9. Schmidbauer, Eric & Stock, Axel, 2018. "Quality signaling via strikethrough prices," International Journal of Research in Marketing, Elsevier, vol. 35(3), pages 524-532.
    10. Tingting Nian & Arun Sundararajan, 2022. "Social Media Marketing, Quality Signaling, and the Goldilocks Principle," Information Systems Research, INFORMS, vol. 33(2), pages 540-556, June.
    11. 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.
    12. Gérard P. P. Cachon & Pnina Feldman, 2017. "Is Advance Selling Desirable with Competition?," Marketing Science, INFORMS, vol. 36(2), pages 214-231, March.
    13. Oksana Loginova, 2021. "Advance selling, competition, and brand substitutability," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1765-1781, October.
    14. Upender Subramanian & Ram C. Rao, 2016. "Leveraging Experienced Consumers to Attract New Consumers: An Equilibrium Analysis of Displaying Deal Sales by Daily Deal Websites," Management Science, INFORMS, vol. 62(12), pages 3555-3575, December.
    15. Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2018. "Deceptive Advertising with Rational Buyers," Management Science, INFORMS, vol. 64(3), pages 1291-1310, March.
    16. Cirillo, Cinzia & Bastin, Fabian & Hetrakul, Pratt, 2018. "Dynamic discrete choice model for railway ticket cancellation and exchange decisions," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 110(C), pages 137-146.
    17. Axel Stock & Subramanian Balachander, 2005. "The Making of a "Hot Product": A Signaling Explanation of Marketers' Scarcity Strategy," Management Science, INFORMS, vol. 51(8), pages 1181-1192, August.
    18. Yunjuan Kuang & Li Jiang, 2023. "Managing presales with two payments and return policy when consumers are time‐inconsistent," Production and Operations Management, Production and Operations Management Society, vol. 32(11), pages 3594-3613, November.
    19. Robert Swinney, 2011. "Selling to Strategic Consumers When Product Value Is Uncertain: The Value of Matching Supply and Demand," Management Science, INFORMS, vol. 57(10), pages 1737-1751, October.
    20. Cuihong Li & Fuqiang Zhang, 2013. "Advance Demand Information, Price Discrimination, and Preorder Strategies," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 57-71, September.

    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:inm:ormnsc:v:61:y:2015:i:3:p:560-577. 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: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    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.