Optimal Preorder Strategy with Endogenous Information Control

In this paper, we investigate the integrated information and pricing strategy for a seller who can take customer preorders before the release of a product. The preorder option enables the seller to sell a product at an early stage when consumers are less certain about their valuations. We find that the optimal pricing strategy may be highly dependent on the amount of information available at preorder and that a small change in the latter may cause a dramatic change in the proportion of consumers who preorder under optimal pricing. Furthermore, the seller's optimal information strategy depends on a key measure, the normalized margin, which is the ratio between the expected profit margin and the standard deviation of consumer valuation. Although the seller may want to release some information or none, she should never release all information. Finally, under the optimal information and pricing strategy, the benefit of preorder is most pronounced when the normalized margin is in a medium range. This paper was accepted by Martin Lariviere, operations management.