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Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee?

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Abstract

I consider a retailer who sells a new product over two periods: advance and regular selling seasons. Experienced consumers learn their valuations for the product in the advancesellingseason,whileinexperiencedconsumerslearnonlywhentheproductbecomes availableintheregularsellingseason. Theretailerisuncertainaboutthenumberofinexperienced consumers. Production takes place between the periods. Unsold units are scrapped at a price that is below the retailer’s marginal cost, which makes it costly to produce and notsell. Ishowthat whenconsumersare lessheterogeneousin theirvaluations, theretailer shouldimplementadvancesellingandofferapre-orderpriceguarantee. Forsomeparameter con?gurations a pre-order price guarantee acts as a commitment device not to decrease thepriceintheregularsellingseason. Inothersituations,itenablesthesellertoreacttothe information that is obtained from pre-orders by increasing or decreasing the price. When consumersaremoreheterogeneousintheirvaluations,themarketsizeuncertaintyissmall, or the scrap value is high, the retailer should not implement advance selling.

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  • Oksana Loginova, 2016. "Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee?," Working Papers 1602, Department of Economics, University of Missouri.
    • Handle: RePEc:umc:wpaper:1602
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    1. 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.
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    9. 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.
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    Cited by:

    1. Marco Sahm, 2020. "Advance-Purchase Financing of Projects with Few Buyers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(4), pages 909-933, December.
    2. Peng, Weicai & Tian, Zhongjun & Wang, Yefeng, 2020. "Price guarantee for advance selling in the presence of preorder-dependent social learning," International Journal of Production Economics, Elsevier, vol. 219(C), pages 115-122.
    3. Jun, Sung Youl & Kim, Kyung Ho & Park, Hye Kyung, 2019. "The effect of the preorder strategy on consumers' product choice: The moderating role of product experience and payment timing," Journal of Business Research, Elsevier, vol. 99(C), pages 80-86.
    4. Junshan Lin & Chenhang Zeng, 2023. "Pre-order strategies with demand uncertainty and consumer heterogeneity," The Japanese Economic Review, Springer, vol. 74(1), pages 83-115, January.
    5. Peter-J. Jost, 2023. "Price commitment and the strategic launch of a fighter brand," Quantitative Marketing and Economics (QME), Springer, vol. 21(3), pages 381-435, September.

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    More about this item

    Keywords

    advance selling; demand uncertainty; learning; price guarantee; price commitment; the Newsvendor problem.;
    All these keywords.

    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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