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Learning in Advance Selling with Heterogeneous Consumers

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Abstract

The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance, while inexperienced consumers learn their valuations only in the regular selling season. The presence of experienced consumers yields new insights. Specifically, pre- orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.

Suggested Citation

  • Oksana Loginova & X. Hnery Wang & Chenhang Zeng, 2014. "Learning in Advance Selling with Heterogeneous Consumers," Working Papers 1408, Department of Economics, University of Missouri.
  • Handle: RePEc:umc:wpaper:1408
    Note: Substantially revised from WP1213
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    File URL: https://economics.missouri.edu/working-papers/2014/wp1408_loginova.pdf
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    References listed on IDEAS

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    1. Özalp Özer & Wei Wei, 2006. "Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information," Management Science, INFORMS, vol. 52(8), pages 1238-1257, August.
    2. 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.
    3. Nocke, Volker & Peitz, Martin & Rosar, Frank, 2011. "Advance-purchase discounts as a price discrimination device," Journal of Economic Theory, Elsevier, vol. 146(1), pages 141-162, January.
    4. Hairong Chen & Mahmut Parlar, 2005. "Dynamic analysis of the Newsboy model with early purchase commitments," International Journal of Services and Operations Management, Inderscience Enterprises Ltd, vol. 1(1), pages 56-74.
    5. Courty, Pascal, 2003. "Ticket Pricing under Demand Uncertainty," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 627-652, October.
    6. 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.
    7. 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.
    8. Nancy L. Stokey, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 355-371.
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    Cited by:

    1. X. Wang & Chenhang Zeng, 2016. "A model of advance selling with consumer heterogeneity and limited capacity," Journal of Economics, Springer, vol. 117(2), pages 137-165, March.
    2. repec:umc:wpaper:1303 is not listed on IDEAS
    3. Chenhang Zeng, 2013. "Optimal Advance Selling Strategy under Price Commitment," Pacific Economic Review, Wiley Blackwell, vol. 18(2), pages 233-258, May.
    4. Oksana Loginova, 2016. "Advance Selling, Competition, and Brand Substitutability," Working Papers 1615, Department of Economics, University of Missouri.

    More about this item

    Keywords

    advance selling; the Newsvendor Problem; demand uncertainty; experienced consumers; inexperienced consumers; learning;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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