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Advance Selling: Effects of Interdependent Consumer Valuations and Seller’s Capacity

Author

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  • Man Yu

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

  • Roman Kapuscinski

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

  • Hyun-Soo Ahn

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

Abstract

We examine the impact of consumer valuation interdependence and capacity on a firm’s optimal selling strategies. We consider a seller who can offer a single product to consumers twice, in advance and in spot. Consumers choose whether and when to buy, but if they buy in advance, they are uncertain about their own valuations. Whether they buy in advance or in spot, consumers’ valuations are realized in the spot period and they may range from fully independent to perfectly correlated, creating markets with different characteristics of aggregate demand for the seller. Facing these consumers, the seller chooses a portion of the total capacity to offer in advance and prices in both periods. We describe how the optimal strategy and benefits of advance selling depend on the interdependence of consumer valuation, as well as capacity level and other market parameters. We find that a change in valuation interdependence can lead to dramatically different policies for the seller. For example, when individual valuations are highly diverse and the consumer population is large, the seller must offer a discount during advance selling but may limit the advance sales. On the other hand, when valuations are highly correlated, the seller can charge a premium price during advance selling. For the same valuation interdependence, the qualitative nature of the optimal strategy changes with available capacity. This paper was accepted by Martin Lariviere, operations management .

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:9:p:2100-2117
    DOI: 10.1287/mnsc.2014.2047
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    References listed on IDEAS

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