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

Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee? 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 advance selling season, while inexperienced consumers learn only when the product becomes available in the regular selling season. The retailer is uncertain about the number of inexperienced 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 not sell. I show that when consumers are less heterogeneous in their valuations, the retailer should implement advance selling and offer a pre-order price guarantee. For some parameter configurations a pre-order price guarantee acts as a commitment device not to decrease the price in the regular selling season. In other situations, it enables the seller to react to the information that is obtained from pre-orders by increasing or decreasing the price. When consumers are more heterogeneous in their valuations, the market size uncertainty is small, or the scrap value is high, the retailer should not implement advance selling. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

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

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Publisher
Springer US
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1007/s11151-016-9507-2
Publisher site
See Article on Publisher Site

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 advance selling season, while inexperienced consumers learn only when the product becomes available in the regular selling season. The retailer is uncertain about the number of inexperienced 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 not sell. I show that when consumers are less heterogeneous in their valuations, the retailer should implement advance selling and offer a pre-order price guarantee. For some parameter configurations a pre-order price guarantee acts as a commitment device not to decrease the price in the regular selling season. In other situations, it enables the seller to react to the information that is obtained from pre-orders by increasing or decreasing the price. When consumers are more heterogeneous in their valuations, the market size uncertainty is small, or the scrap value is high, the retailer should not implement advance selling.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Mar 3, 2016

References

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